Uninsurable Risk in Energy Efficiency Projects to be Examined
A pilot program intended to remove unknown or unacceptable risk as a barrier to energy efficiency development is being launched. Energi, a developer and underwriter of energy insurance programs, and the Energy Department’s National Renewable Energy Laboratory will analyze and begin to quantify uninsurable risk associated with small building energy efficiency retrofits.
Potential for energy savings in the small building sector is extensive, with more than 90 percent of commercial buildings and more than 40 percent of the energy used in those buildings. Quantifying uncertainty in energy savings and uninsurable sources of uncertainty will allow lenders to estimate the performance boundaries of small building efficiency retrofits that are needed to control lending risk, according to the Energy Department.
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 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.
No accepted methodologies currently exist 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 said that energy professionals estimate 25 percent of energy projects annually are derailed by uncertainty on estimated savings. A standard approach to account for uninsurable risks may allow lenders to make more accurate underwriting decisions on loans, stimulating lending, investment and development.
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