“What if insurance, yes, insurance, could be a powerful ally in decarbonizing the economy, really helping us to actually get to scale a little bit faster on deploying … climate tech?” -Lara Pierpont
Spoiler alert: it can. It’s all about deciphering complex risks and harnessing risk transfer to coordinate an appropriate risk profile.
Our Co-Founder, Jeff McAulay sat down with Lara Pierpont for Shayle Kann’s Catalyst podcast, and discussed how insurance can actually help usher in climate mitigation solutions, in addition to playing a role in the climate response side of the equation.
Often, when people think about climate tech, naturally weather and natural disasters are the first risks that come to mind. After all, climate-related risks are growing rapidly. SwissRe estimates “that climate risks will grow the global property risk pool by 33-41%.... by 2040.”[1] The risks and costs of global climate change are significant; we must focus as much as possible on mitigating these risks and costs.
When we shift to thinking about mitigation, decarbonization and deployment of renewable energy, there are a different set of risks to be managed.
As Jeff notes, “there are a lot of businesses buying solar electricity, but many of them who would like to have solar or other renewables are unrated or below investment grade. Because of those challenges, they have a hard time getting financing, even though solar would save them money in the long run.”
We’re talking tens of thousands of large C&I prospective energy customers who are blocked from procuring renewables due to their inability to access project finance markets.
At Energetic Insurance, we are trying to solve for deployment hurdles, not only for solar and renewables, also for energy efficiency, storage, and other cleantech solutions. We realize it is not technology risk that is holding back deployment, it is something else; offtaker credit risk. Credit risk relates to the likelihood that any given offtaker will continue to pay for the electricity generated, thus enabling ongoing debt repayment. PPA terms are long, often ~20-years. There is always the risk that a business cannot meet all payment obligations. This is sometimes exasperated by single events, as we recently witnessed during the global pandemic, especially as businesses needed to halt certain operations.
We further realized that insurance, specifically insurance that covers offtaker PPA payment default risk, can mitigate the financing hurdle and allow for more confidence and predictability of cash flows at the project-level. This is done by developing and harnessing innovative risk transfer models and mechanisms that de-risk the project for developers and financiers. These tools allow us to decipher and transfer risk efficiently, potentially unlocking capital for projects that otherwise might be overlooked by financiers and/or enabling a lower cost of capital.
Consider a solar project that involves sponsor equity, tax equity, and debt. For project developers and sponsors, the overall metric of success is their levered IRR – it is critical that they get the best terms of debt possible. This is essential for end user C&I companies as well, as the LCOE, or levelized cost of energy, associated with the project will be directly linked to the cost of the debt capital which is a partial driver of the ultimate PPA pricing – the more costly the capital, the higher the LCOE and the higher the PPA price offered to the end user.
Ultimately, we allocate risk efficiently between the offtaker, developer, financier, and insurance provider. Shifting some risks to an insurance balance sheet may allow the total cost of capital to fall for the project, and that directly impacts LCOE, expands the market, potentially lowers costs, and accelerates deployment.
What is the result?
Insurance can actually enable and encourage transitions to climate-saving, resilient infrastructure.
So, is the solution adding more insurance? Creating new insurance products is not easy. The complexity and diversity of the projects and location-based regulations at hand present a barrier for investment selection. Uncertainty on the short and long-term impacts of emerging regulations abounds in such areas as net metering, RECs, or community solar programs. This can spur increased costs; the more complicated an opportunity is, the higher the perceived risk, and the more investors expect to get paid for putting their money at risk. Allocating risks efficiently is no easy feat given the heterogenous market and the lack of standardized risk profiles and packages.
We collaborate with developers and financiers to determine the most efficient way to cover the risks and to unlock the overall lowest cost of capital, enabling projects to be done quickly and efficiently at scale.
We are confident that insurance already is, and will increasingly be, an enabler of deployment and resiliency. The insurance industry is well poised to send (pricing) signals that encourage climate adaptation behavioral change. If risks are reduced, lower insurance premiums might be available, and if insurance can't be procured on a cost-effective basis, dollars will flow to lower-risk opportunities.
The market for our product in solar remains sizable. We are ready to help deployment in other high-impact areas, including areas like energy efficiency, in which technology is proven, but financial and other risk-related barriers are holding back deployment.
Interested in others addressing risk management in renewable energy? Have a look at our friends at REsurety and Omnidian who are addressing asset performance and weather risk, and at New Energy Risk, addressing early-stage technology risk.
Thanks to Lara Pierpont, Shayle Kann, Post Script Media, Canary Media, and the Catalyst podcast team for helping to demystify the role insurance can play in clean energy deployment.
[1] https://www.swissre.com/institute/research/sigma-research/sigma-2021-04.html