Fueling the Flow: Liquidity Growth as a Key Driver to Utilize Credit Insurance and Bonding for Assurance

Pat McKinnon
Pat McKinnon

The energy markets are driven by liquidity. Counterparty, credit, and market liquidity are all significant to operations in both the real-time and long-term regimes. All of these types of liquidity are balanced against the seemingly endless list of risk categories. Fundamentally, clearing risk hurdles allows for access to liquidity which in turn promotes growth.

Historically, the energy markets have utilized basic tools to achieve this balance: cash deposits, letters of credit, managed open credit and clearing through the exchanges for financial risk. The simple approach is made possible by the nature of the business.  Common contracts and terms, similar operating practices across the infrastructure and strict adherence to “industry norms” have provided the certainty it takes to commit to the large notional values required to operate in the energy world.

New Opportunities for Growth

What has been missing are alternatives to expand the commercial exposure horizon, maintain or improve counterparty risk profiles and effectively “clear” the risks for physical commodity as well as the associated transportation, storage and processing requirements. The traditional tools, while effective, have inherent limitations including cost, operating capital burdens and disproportional opportunity costs.

Why EH Energy?

The entry of Euler Hermes Energy into the market has created a foundation to utilize the financial strength of the insurance industry to provide an efficient, meaningful alternative to traditional methodology. By adapting credit insurance contracts to align with the standard enabling documents for the energy world and modifying bonding formats to match terms required across the spectrum, EHE is now a true liquidity agent for the energy industry.

Primarily, the applications fall into two distinct categories: commodity supply and transportation/processing assurance. 

Commodity Supply

Simply put, commodity supply is the purchase and sale of energy commodity.  For most commercial applications, credit insurance is a good fit.  Allowing for expansion of limits with little or no risk impacts, counterparties may now transact at higher levels for longer terms without tying up capital in letters of credit, stretching internal risk limits, or stranding cash. Used in conjunction with current tools, credit insurance is now a viable tool to expand commercial exposures and grow the business.  It is in real terms an additive, complementary and cost-effective source of liquidity. 

For some constructs, such as larger standalone term supply contracts or ISO credit requirements, bonding is a parallel resource to letters of credit with some distinct advantages. Terms available are now commensurate with traditional energy LoCs.  100% cover, fully callable, short payout periods and “on demand” execution are all incorporated. In addition, bonding is not a drain on capital lines and is in most cases lower in cost than LoCs. In combination, these tools dramatically expand the available commercial footprint.

Transportation/Processing assurance

From the very outset of the industry, the concept of assurance for transportation and processing has been industry practice and is supported by governance both public and private. Literally codified in the regulatory language, the practice is fundamental to support infrastructure and processing resource development. However, the tools to accomplish this have not evolved past the aforementioned traditional methods. This has created a strain on development due to the large capital requirements and the demand for certainty by market participants. 

EHE On Demand Payment Bonding exists to help take the strain out of the equation by providing bonds, properly construed and at sufficient notional value to allow pipelines, shippers, processors, utilities and customers to operate and develop with confidence.  Replacing cash and LoCs, bonds tap into the economic capability of the insurance industry and unlock the potential for larger participation in the energy ecosystem. Whether utilized independently or in concert, the new tools on offer from EH Energy fuel the flow of energy.

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