Energi, a developer and underwriter of energy insurance programs, today announced a pilot program focused on overcoming one of the largest barriers to financing energy efficiency in small buildings: unknown or unacceptable risk. Energi will work with the Energy Department’s National Renewable Energy Laboratory (NREL) to analyze and begin to quantify uninsurable risk associated with small building energy efficiency retrofits.
According to energy professionals, annually 25 percent of energy projects are derailed by uncertainty on estimated savings. Developing a standard approach to accounting for uninsurable risks will allow lenders to make more accurate underwriting decisions on these loans, stimulating lending, investment and development.
“The potential for energy savings in the small building sector is very large, accounting for more than 90 percent of U.S. commercial buildings and more than 40 percent of the energy used in those buildings,” says Rois Langner, project manager at NREL. “By quantifying uncertainty in energy savings and uninsurable sources of uncertainty, lenders will be able to estimate the performance boundaries of small building efficiency retrofits that are needed to control lending risk to an acceptable level. We believe the outcome of this collaboration will begin to enable capital for these efficiency projects to flow more freely, accelerating the uptake of energy efficiency technologies and techniques in this sector.”
For energy efficiency retrofit projects, much of the performance risk can be borne by an energy insurance company, where the service provider or energy service company (ESCO) guarantees the savings to the owner, and the insurance policy protects the service provider. However, not all of the risk can be covered by a guarantee and insurance policy.
Currently, there are no accepted methodologies for banks to account for variability in project performance due to risks not covered by insurance, such as occupancy changes and extreme weather. A key goal of the pilot project will be to develop a methodology that lenders can use to estimate the “buffer” for these uninsurable risks in energy efficiency retrofits. The results of the pilot could also be applied to rating and securitization of energy efficiency loans, providing a consistent buffer range and approach for analysis and control of uninsurable risks.
“Energi’s experience in the market has shown that energy savings insurance can mitigate leading sources of project performance risk and allow financial institutions to increase their confidence in energy efficiency project loans,” says Angela Ferrante, vice president of Alternative Energy Solutions at Energi. “According to energy professionals, annually 25 percent of energy projects are derailed by uncertainty on estimated savings. Developing a standard approach to accounting for uninsurable risks will allow lenders to make more accurate underwriting decisions on these loans, stimulating lending, investment and development.”
Energi’s Energy Savings Warranty (ESW) program backstops performance guarantees offered by energy efficiency contractors, and is written through the International Insurance Company of Hannover, a subsidiary of Hannover Re. The ESW program will be the basis for defining and understanding uninsurable risk, and Energi will work with lenders to provide criteria for risk buffers and certainty levels required to increase project financing.