Renewable Insurance: Atlas of the Capital Stack

In the flood of venture capital money and the use of government tax credits to encourage the development of solar, wind, and other forms of renewables, the insurance industry often appears as an afterthought. However, few aspects of green finance prove as necessary to the feasibility of green energy projects as the insurance industry. The security required for trillions of dollars of investment requires insurance backing, making climate insurance the basis for much of climate financing. If the world of climate financing is built on the back of the insurance industry, it is essential to understand its role.

Some form of insurance will be utilized for the majority of the total investment in climate transition by 2030. According to a report by Howden, more than 10 trillion of the 19 trillion in investment capital required will need insurance coverage. Insurance solutions are not limited to simply protecting assets or guaranteeing validity; insurance can also manage risk and scale new technologies.

In conversation with James Bowen, a Senior Advisor at RenewableGuard and co-founder of Energetic Insurance, he outlined the role of the insurance sector in addressing creditworthiness gaps in the market. As Bowen explained, one of the principal efforts of Energetic was to address the "misperception of risk" where, despite a low risk, financing was prevented do to a lack of investment-grade ratings.

The scale of investment for specific clean energy projects is one of several challenges that face the renewable finance sector. The cost of insuring individual assets, such as a battery production center, can exceed what insurance companies are willing to insure for a single asset. New technologies, such as green hydrogen or new battery chemistries, require billions of dollars of investment but come with significant risk. Without insurance, it is unrealistic to think that these technologies will ever scale to large production facilities.

Without insurance, neither commercial banks nor project finance funds will provide the capital to build new projects. Project developers purchase insurance on the insistence of financiers, who want protection against certain risks. One of the challenges that has accompanied the industry thus far is its relative infancy. The long-term data, which is so valuable to other insurance industries, may not be available for renewable assets. 

During a meeting with Aaron Ratner, an Investment Professional at Kingston Infrastructure Partners and co-founder at CC Insurance Solutions, he explained his experience in the industry. Specifically, how partnerships between climate insurance brokerages and energy transition companies led to higher project closing probabilities and improved access to capital. Despite this potential, Ratner outlined the bottlenecks that are currently hindering the industry, including limited reinsurance capacity, insurance becoming involved in projects too late, 

A report by the Geneva Association found that one of the first steps in the insurance space is to involve reinsurance and reinsurers in the project early. A survey included in this report of insurance executives found that these insurance specialists could be involved in new technologies and projects from the pre-commercialization stage. These insurers can also help structure and source investable-grade projects. To secure financing for these projects, policies must be in place to standardize and require disclosure and reporting of relevant information. Additionally, by encouraging the insurance sector to get involved at the early deployment stage, insurers can use their expertise to frame risk, outline requirements for insurability, and attract more capital through risk-adjusted returns.

The abilities of managing general agencies (MGAs) to create insurance products for a relatively new market, one that is still considered to be challenging. Essentially serving as specialists, with the balance sheets of larger insurance companies to draw upon, they can provide the specialty experience necessary for new technologies or financing new products. Specialist MGAs currently exist for renewable energy markets to provide mandatory insurance underwriting or credit enhancement. Additionally, these agencies can be utilized in carbon markets to protect buyers or as specialists in areas such as offtake risk or weather-related risk.

Involving insurance in a project's planning and financing allows for higher project closing probabilities and improved access to capital.

The variety of MGAs in the renewable insurance industry provides access to valuable insights across different aspects of the market. For instance, an MGA such as kWh Analytics can provide the necessary underwriting authority focused on property insurance, providing insurance against natural disasters and physical damage that may harm a renewable project. Michael Bachrodt, Chief Operating Officer at kWh Analytics, outlined how MGAs play a critical role in first aggregating and then analyzing the specific data required, enabling carriers to handle projects effectively. As Bachrodt explained, the ongoing flow of data and analytics generates a feedback loop, thereby refining the model. 

Energetic Capital is an MGA that focuses on ensuring projects against the failure of the off-taker to take energy. MGAs that allow for individual specialization in aspects of renewable insurance are crucial to the industry's rapid growth, as they can address specific problems unique to this market. As Nathan Maggiotto, Senior Vice President of Strategy and Business Development at Energetic Capital, explained, MGAs allow for unique market access. Additionally, because MGAs focus on a specific aspect of climate insurance, their expertise can accelerate product development.

Whether to guarantee an offtaker, protect a project's viability against physical damage, or ensure the validity of carbon credits, new forms of insurance will play an essential role in driving more capital to climate solutions. The first, and most critical, way to better utilize insurance in the capital stack for climate projects is to engage with insurance early. Bringing insurers into the project early enables the development of customized plans that account for the diverse factors that may be at play for a new technology or generation project.

Large insurance brokers, such as Marsh, have demonstrated the viability of global insurance players to enter the renewable energy market. Marsh supports more than 650 GW of renewable energy projects worldwide. During a written interview with The Energy Pioneer, Katie Burke, Marsh’s US and Canada Renewable Energy Industry Leader, outlined the benefits of involving risk mitigation early in the financing of green energy projects. As Burke writes, this allows for early assessment of land from an insurability perspective and creates natural catastrophe modeling. An additional consideration arises from the type of technology used. Whether the project utilizes new or existing technology, as well as the manufacturer's experience, impacts insurability, maintenance, and performance.

For an industry requiring trillions of dollars in investment over the coming years, insurance must be readily available. While challenges stem from the new technologies, the industry's relative infancy, and technical complexities, the insurance industry has found itself at the center of the transition to clean energy. The weight of financing the transition to clean energy may well rest on its shoulders.