This article describes how energy savings insurance can be purchased for an affordable premium to insure the performance of large scale energy efficiency projects, thereby reducing the financial risk that a project will not perform as projected.
What Is Energy Savings Insurance?
By guaranteeing performance, energy savings insurance is an insurance policy that addresses the potential “energy performance gap” that exists in any large scale commercial energy efficiency project.
Energy savings insurance is for contractors, building owners and lenders to help them move forward on large scale energy efficiency projects with a higher level of confidence that projects will pay off as projected.
By insuring their work, energy efficiency contractors gain a competitive advantage in winning sought after large deals…
Building owners are more likely to agree to a large ESCO project with the reassurance that comes from a project that is backed by an insurance contract from a reputable carrier.
And lenders love the reduced credit risk that energy savings insurance provides.
The result is that all parties benefit from energy savings insurance in the form of greater confidence in the projected energy savings performance of complex deals.
What’s “The Energy Performance Gap” Problem?
The “energy performance gap” is the potential difference1between projected energy savings and the actual energy savings realized after an energy efficiency project is complete and operating in the real world.
Because large multi-measure energy efficiency projects are complex, under performance risk is one of the biggest “buyer fears” of building owners and investors…
As a result, the potential energy performance gap is one of the biggest threats2 to contractors in getting large deals done.
How Energy Savings Insurance Solves The Energy Performance Gap Problem
Energy savings insurance solves the energy performance gap problem because it guarantees energy efficiency performance…
For an affordable premium, equal to a small percentage of the savings, an insurance policy can be obtained guaranteeing that if an energy efficiency shortfall occurs, the policy is triggered, paying the customer.
This reduces risk for all parties.
For building owners, having their energy efficiency project performance backed by a policy from an >A+ rated insurance carrier reduces the uncertainty that highly technical energy conservation measures (ECMs) may not deliver.
And lenders, such as banks and CPACE financiers, value having energy efficiency insurance in place because it can reduce default risk and increase creditworthiness… Potentially reducing the borrower’s cost of debt.3
How Else Does Energy Savings Insurance Reduce Risk?
While many energy efficiency projects exceed expectations, it is sometimes the case that multi-measure energy efficiency projects underperform due to unrealistic projections and overly optimistic assumptions in energy modeling.
Indeed, poor energy modeling is listed as the primary culprit in an article by the Yale School of Forestry and Environmental Studies.4
Energy savings insurance addresses these shortcomings and enhances such projects through project underwriting.
Because energy savings insurance carriers have skin in the game (they want to minimize the risk of claims or losses) the insurance underwriting process means the project is more likely to perform.
Indeed, top ESCOs pay for energy savings insurance because it gives them an advantage against their competition and it provides an additional level of quality assurance for their customers.
What Does Energy Savings Insurance Cost?
The cost of energy savings insurance – the premium that is paid – varies from 2%-6% of the projected energy savings of an energy efficiency project.
For example, assume an energy efficiency retrofit project with projected savings of $200,000 per year, or $1,000,000 over five years.
If a contractor wanted to guarantee the majority of the $1,000,000 in energy savings performance for five years, and the premium for energy savings insurance is 4%, this would mean a $40,000 one time premium.
The premium is a one time premium and is usually paid by the energy efficiency contractor… The client is named as the insured on the policy.
Energy savings insurance will not make sense for every energy efficiency project…Â Energy efficiency projects must be large enough, and have ample projected savings, to justify the minimum earned premium to underwrite a policy.
Realistic Energy Savings Insurance Cost Example
Mike is a top salesperson for ABC Energy Efficiency, an ESCO5 based in New York City…
Mike meets with a large hospital and learns that they are exploring ways to reduce their operating costs.
Mike and his team from ABC conduct and energy audit of the hospital… They identify a list of attractive energy efficiency improvements, including LED lighting, HVAC upgrades, variable frequency drives, insulation and water efficiency measures.
The cost to the hospital to make the improvements will be $1,050,000 and will result in a projected energy efficiency savings of $200,000 per year.
The measures should pay for themselves in around 5 years… And have an expected useful life of 20 years providing $4,000,000 in savings, roughly a 400% return on investment (ROI), to the hospital over the long term.
Because of the incredible savings and the projected 5 year payback, the hospital is very interested.
Mike and his team are highly experienced and confident in their projections… The team develops a comprehensive historical baseline analysis of the hospital’s energy, electricity and water use.
They also perform a thorough investment grade audit and engineering study… And produce an energy model and measurement and verification plan.
Hospital management is interested… But they need a higher level of confidence because the energy efficiency project is a significant investment.
The project must also be approved by the Board before they can move forward on the $1,050,000 project.
ABC’s insurance broker underwrites an energy savings insurance policy to guarantee 90% of the projected savings for a 6 year term…6
The resulting insurance policy eliminates the risk to the hospital that the project will not pay back as projected.
The hospital Board and management view the project as very low risk because ABC’s insurance guarantee exceeds the projected 5 year payback period for the hospital, thereby eliminating their risk of non-performance.
ABC is willing to invest in the policy to get the deal done because it makes economic sense and because they view the project as strategic with the possibility for additional work later on.
The Result
In the end, the hospital management and the Board “OKs” the project.
ABC wins the deal and buys the insurance policy, which costs $48,000, and names the hospital as the insured if a shortfall is triggered.
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Footnotes
- Usually a shortfall in energy efficiency performance... But energy efficiency projects have also been known to exceed performance expectations.
- Indeed, even the lack of capital or financing for energy conservation measures is no longer a major impediment to energy efficiency opportunities... Financing challenges have been addressed by energy efficiency lending programs such as CPACE. Commercial Property Assessed Clean Energy is an economic development program designed to finance commercial building energy efficiency and renewable energy investments.
- Lenders may also be able to reduce interest rates and ESCOs may be able to reduce loss reserves held on balance sheet. CPACE lenders may find that energy savings insurance backed projects are easier to securitize.
- "Why Green Buildings Don't Live Up To The Hype In Energy Efficiency".
- Energy Savings Contractor
- To insure 90% of the total $1,200,000 projected annual energy savings for a period of 6 years. The policy guarantees that 90% of the 6 year savings, or $1,080,000, are guaranteed and backed by energy savings insurance.
