Can Insurance Boost Early Stage Clean Technologies?

A mutually beneficial scenario includes accurately evaluating and pricing the performance risks of emerging technologies, developing profitable new insurance practice areas in the process.

Insurance Networking News, October 12, 2011

INN Editorial Staff

Developers aiming to use emerging clean energy technologies face myriad challenges, chief among them is finding the capital to get a new power plant in the ground. In a white paper released today, The California Clean Energy Fund (CalCEF) is proposing a suite of new private insurance instruments and policy frameworks to help address this issue.

The paper examines the ways in which insurance can help to reduce the cost and increase the availability of financing for power generation projects that use emerging clean energy technologies, and details new insurance products and policy solutions that could reduce the cost of developing energy projects using new technologies by 10-20%.

In general, commercial lenders are hesitant to provide financing for such projects until the technology is more fully proven, and other financing options can be considerably more expensive. If insurance products were able to significantly limit the exposure of lenders and other financiers to technology performance risk, total project costs could fall by as much as 10 to 20 percent, notes the report. These instruments would reassure investors by providing for cost recovery even if a new technology's commercial deployment performs below expectations.

"To meet this nation's energy challenges, business and government must eliminate obstacles for technology to progress from the lab to the real world," said CalCEF director and former CPUC Commissioner, Ambassador John Bohn. "CalCEF's proposal can mitigate a significant barrier faced by transformative energy innovations."

Some of the approaches to market development described in the new white paper are:

-- Educate insurance providers about risk transfer needs through the creation of a clean energy insurance coalition comprising business and engineering professionals from across renewable energy technologies.

-- Improve underwriting data through new information service providers that aggregate energy equipment and system performance data to help insurance underwriters assess the distribution of performance outcomes and failure rates.

-- Create new primary insurers, managing general agents (MGA) and reinsurers, employing professionals from energy, engineering, underwriting, and actuarial disciplines to bridge the gap between the renewable energy industry's risk transfer needs and insurance industry capital.

"Some people compare the current energy transformation to the space race, and indeed there are parallel precedents in the market for risk--insurance for satellite launch and for nuclear power plants are but two examples," said Rob Robideaux, SVP at Marsh Private Equity and M&A Services. "By more accurately evaluating and pricing the performance risks of emerging technologies, we can encourage innovation, tackle major energy challenges and develop a profitable new insurance practice area."

CalCEF recommends various federal and state public policies that promote technology efficacy insurance as part of an integrated technology deployment strategy. Such policies would support commercial approaches, aiding achievement of many states' renewable portfolio standards (RPS) and other near-term clean energy goals. The creation of an insurance program by the U.S. Department of Energy (DOE) has the potential for the broadest impact. This highly effective mechanism would provide financial support broadly across the clean energy industry, which reduces private capital providers' exposure to technology risk and thereby bridges the project financing gap. In addition to its direct benefits, a DOE-supported reinsurer would create an environment in which the private solutions described above are more likely to develop.

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