The utility industry gets much attention about sector-wide disruptions triggered by new Smart Grid regulatory policy, technology, and financial drivers on the path to grid modernization. But the insurance sector is also facing real challenges on two fronts – dealing with the downsides of climate change; and building tools, models, and knowledge to properly insure distributed energy resources (DER) such as renewable generation assets. A national energy policy that promotes renewable generation and energy storage could certainly help them with both challenges.
Insurance companies are making the connection that property claims are increasing in frequency and value as climate change produces more storms of greater intensity marauding across inhabited spaces. New risk assessments will include increased incidence of dangerous heat waves that impact crops as well as animal and human health. And big underwriting changes could impact coastal populations as rising sea levels may render some areas uninsurable for property and infrastructure investments.
Some insurance companies already offer insurance products for renewable energy projects. But it hasn’t really gone mainstream yet, with most insurance being custom-designed for projects. Typically, insurance companies provide standardized risk management and risk transfer solutions for projects – as is currently done for fossil fuel generation assets. This in turn affects the cost of capital for energy projects. A national energy policy would help provide guidance on risk exposures that can impact return on investment (ROI) calculations for renewable energy projects. A national carbon market would help standardize risk assessments. A national carbon tax would improve underwriting for both fossil fuel and renewable energy sources because it would incorporate the significant external costs of carbon into infrastructure investment decisions. A national renewable energy standard would reduce uncertainties or risks in investments in small- to large- scale projects.
These policy actions help insurance companies develop underwriting philosophies and guidelines for property, liability, and loss of income risks necessary to secure project financing. Policies that encourage displacement of fossil fuels with clean renewables would have meaningful impacts on systemic risk evaluations of lifetime project revenues. A national energy policy delivers stability and eliminates the boom/bust cycles that the US Congress inflicts on renewable energy infrastructure investments with their cyclical tax treatments. Contrast that to the permanently embedded tax breaks and subsidies for established technologies and immensely profitable oil companies. Is it any wonder that insurance companies might find fossil fuel infrastructure investments less risky than renewables? But on the other hand, the insurance companies also know that more fossil fuel projects simply increase the downsides of climate change.
Renewable generation and energy storage technologies are new, and may often incorporate revolutionary advances in materials, fabrication, or engineering designs. There’s a lack of accumulated performance data to create statistical models of potential risks and outcomes. Its difficult today to provide satisfactory answers about the likelihood that a new solar cell material will perform to manufacturer’s projections for the lifetime of the product or the likelihood that a particular solution will generate a targeted amount of electricity.
Beyond technology concerns, many of the players in the renewable energy/energy storage space are relatively new and/or small companies. They have higher perceived credit risks that make insurance for their projects more expensive. Here again, a national energy policy that includes public funding can enhance credit and bolster private financing for renewable energy projects, and reduce risk assessments made by insurance companies.
Issues like these will impact insurance for every DER asset deployed in the distribution grid, so it’s not just an issue for utility-scale renewable deployments. It’s a tremendous challenge that impacts our abilities to realize the full potential of DER embedded in the distribution grid to deliver reliable and resilient electricity – the goal of transactive energy models.
The United Nation’s Environment Program assembled recommendations for the insurance industry in the Renewable Energy Insurance Training Kit. It’s a good source of information for everyone interested in learning more about this complex topic and should be required reading for politicians to help promulgate a sensible national energy policy.