Some of this increase can be accomplished by investment in
existing, commercially proven technologies; but to meet the
challenge of rapidly scaling renewable energy, we also need to roll
out cutting-edge technologies.
Financiers often hesitate to fund the first commercial
deployments of new technologies because such projects carry an
unidentified level of risk around reliability at scale and
long-term performance.
This dubiousness prevents capital from reaching technologies
poised for commercial scale -- technologies that have gone through
lab and pilot-stage testing, but are just beginning to be deployed
in commercial scale projects.
For example, enhanced geothermal generation, which requires
accessing heat deep within the earth, integrates new drilling
methods with relatively unknown risks, making it relatively
difficult and/or prohibitively expensive to finance.
New Solutions for New Problems
Currently, a handful of insurers, brokers and supporting service
providers have ongoing initiatives focused on clean energy. Some
have tailored their traditional business insurance offerings to the
needs of clean energy companies by developing non-traditional
products that address warranty, performance, and related risks.
The California Clean Energy Fund (CalCEF) proposes
a set of new insurance tools to improve the investment environment
for projects employing these emerging clean energy
technologies.
Insurance products tailored to mitigate the unique risks
associated with these projects would eliminate a significant
barrier to investment. Along with establishing insurance providers,
our solution includes an industry effort to collect data on new
technologies' performance and government support for insurers.
So-called specialty insurance has a long
history of managing risk and closing financing gaps for other
industries that initially operated under big unknowns: nuclear
energy, commercial satellite launch, aerospace, property
catastrophe, and industrial-scale crop production.
The role of innovative insurance products in enabling nuclear
power to pass from the lab to ubiquity is especially instructive.
To ensure that America's nuclear power industry continued to grow
in the 1950s, Congress created a liability insurance program, which
would protect the power plant owner from uncapped exposure for a
catastrophe like a meltdown. The plant owner is required to buy the
maximum coverage available in the market.
The owner's total liability is capped at a specific, manageable
amount -currently approximately 1.5 times the total private
insurance coverage. In cases where losses would exceed
that ceiling, the government would act as a reinsurer and make
direct payments to claimants.
The insurance industry isn't starting from scratch in creating
risk mitigating insurance models for clean energy technologies. The
current core offerings - equipment warranty insurance for the solar
PV industry, carbon capture and sequestration insurance and PV
installation insurance - cover certain performance-related risks
for established technologies.
They do not address the system performance risks that first- and
early-commercial technologies face, but they do establish a
precedent for the kind of "efficacy insurance" CalCEF suggests is
necessary. This broad category can be defined as any insurance that
provides financial protection against the failure of a product or
system to perform its intended function.
Recommendations
In imagining a practical solution, CalCEF recommends three
fundamental components: databases of technology-specific and system
performance data, new insurance providers focused on specific
segments of the clean energy market and a federal reinsurance
program.
Since insurers must perform sophisticated statistical analysis
to design products, they require abundant data. Unfortunately,
there is very little historical performance data from leading edge
energy technologies.
To address this shortfall, formation of new databases should be
focused on emerging energy technologies. CalCEF will start with the
solar industry, in collaboration with industry group SolarTech and
other partners - national laboratories, universities, test and
certification companies, project developers and project financiers
- to develop an industry-wide repository of analytical tools and
performance data for energy systems and sub-systems.
Once data is aggregated, the industry must launch new insurance
underwriters. There is an opportunity for an insurance solution
comprised of two entities: mutual (or captive) insurers and a
managing general agents (MGA).
The mutual insurer - the entity with the assets and financial
power to underwrite policies - would focus on the needs of industry
segments and facilitate pooling of risk by parties who have a
direct financial interest in the application of such products.
Profits resulting from better-than-expected underwriting results
would be rebated or reinvested to support the industry through
growth in underwriting capacity.
MGAs would more directly interface with emerging technology
projects. Since they would have the advantages of dedicated, expert
resources without the burden of raising massive amounts of capital,
MGAs we envision would have the flexibility to develop
comprehensive products that address system performance risk
concerns of potential investors for specific large-scale energy
projects.
As with insurance for nuclear energy, natural disasters and
large-scale crops, government policy has a central role to play.
Government should share some of these insurers' risk, or 'reinsure'
the policies. This would encourage private insurer participation in
new clean energy insurance schemes by limiting industry losses
while ensuring affordable and reasonable policy terms and prices
for renewable energy insurance purchasers.
The lion's share of the $400 billion needed annually to meet our
clean energy challenges will need to come from the private sector.
From where CalCEF sits - at the intersection of clean energy
policy, finance and innovation - these insurance innovations are
among the most promising tools we have to encourage such
investment.
We invite you to join us as we build a powerful solution to one
of the core financial challenges faced by emerging technologies.
With this challenge addressed, the market can look forward to a
flourishing of innovative projects with the potential to solve many
of our environmental problems while delivering broad financial
reward.
This article first appeared in the January 5th 2012 edition
of RenewableEnergyWorld.com and is reprinted here
with the kind permission of the author. The CalCEF Innovations
group was formed in 2008 to design and pilot business models,
financial products and public policies that grow clean energy
markets and accelerate adoption of clean energy technologies. Check here
for more information on CalCEF.