Monday, October 24, 2011

A Big Win for Energy Savings Insurance

A few weeks ago a business consortium including Lockheed Martin and Barclays Capital announced the largest single private-sector investment to-date for commercial property energy efficiency retrofits. The business consortium, referred to as the PACE Commercial Consortium, was created by the Carbon War Room, a Washington, D.C based non-profit group set up by British entrepreneur Richard Branson. The consortium will provide up to $550 million in financing for city-led PACE projects in Miami and $100 million for projects in Sacramento. The consortium is led by Ygrene Energy Fund of Santa Rosa, California. Loans will be provided by Barclays Capital and Lockheed Martin will provide project management and engineering services. Energy savings guarantees will be insured by Energi Insurance Services of Peabody, MA with paper backed by global re-insurance giant Hannover Re.

Energy savings insurance was first offered approximately 15 years ago, but failed to make much headway in the emerging energy efficiency marketplace principally because most of the work was being performed in the public market by large energy service companies (ESCOs) who could back their guarantees with strong balance sheets. However, with energy efficiency now moving firmly into the hugh commercial market, hundreds of energy service companies are now playing in the game, many without the financial strength of the large ESCOs. Energy savings insurance can provide a backstop to the performance guarantees made by these smaller ESCOs.

It is good to see the insurance industry, beginning with Energi and Hannover Re, coming back to the market. There is definitely a need for the product. I believe it can do much to remove the uncertainty asssociated with energy savings projections and thereby avoid disputes between building owners and ESCOs. It should also reduce the risk associated with energy efficiency lending and lower the cost of financing. As in many other areas in our industry, insurance can once again act as the grease to make the deals move forward.

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