Can Insurance Unlock Investments in Clean Energy and Technology?

Our demand for electricity is growing while climate impacts are rapidly stressing communities across the country. The imperative to invest in clean energy and clean technology—innovations that improve sectors like energy production, storage, transportation, and agriculture—at scale has never been greater.

A recent Kleinman Center webinar explored how insurance is critical to the deployment and expansion of cleantech. Insurance helps with the following:

• Managing performance risk: Clean technologies, by nature, are often novel and unproven at scale. Insurers help quantify and transfer the financial risks associated with equipment failure, underperformance, or unforeseen technical issues—making it safer for developers and investors to move forward with projects.
• Attracting investment: Lenders and investors typically require insurance coverage before committing capital to clean technology projects. Without it, financing becomes nearly impossible to secure.
• Project bankability: A project is considered “bankable” when it meets the standards required to obtain financing. A variety of insurance coverages are typically required for a new energy or technology project to qualify for loans. “We recently reinsured a credit insurance policy that helped make a utility-scale solar project in central Texas bankable, exactly the kind of gap we exist to fill in a decarbonizing economy,” reflected Jeff McAulay of GreenieRE during the webinar.
• Enabling innovation: Since insurance helps manage the risks of financial shocks that would be too devastating for a firm to manage on its own, it enables innovation that could otherwise be too risky to pursue.
• Meeting regulatory and contractual requirements: Many government programs, power purchase agreements, and grid interconnection contracts require proof of insurance as a condition of participation, making it a practical necessity.

There are many types of insurance that support cleantech. A project or firm may need property insurance to protect buildings, infrastructure, or equipment from damage from natural disasters or other perils, or construction insurance to protect against the same types of damage during construction. A firm could need liability insurance or directors and officers coverage to protect its executives. They may need workers’ compensation and employee health insurance. They may also seek some form of performance risk to protect against various forms of underperformance. Political risk insurance could be purchased for investments, depending on the host country’s dynamics.

Some in the insurance industry may shy away from new or emerging technologies whose risks are not well understood, since underwriting them requires specialized expertise. Others, such as those represented on the webinar—New Energy Risk, Chubb Climate+, and Greenie Re—are leaning into this space, investing in the technical expertise to support the sector.

These types of firms may offer coverage for risks not found in standard policies and may also adapt coverage to the specialized needs of new firms or new technologies. This could mean offering insurance for longer terms to match loan lengths, or introducing new products, such as tax credit insurance. It could also mean designing insurance to grow and evolve as technology and/or the firm matures. Technologies—and firms—will need to evolve their coverage as they grow; it is not simply that they may need higher limits, but that the types of coverage they need will likely evolve.

The investment in deeply understanding the risks allows insurers to do more than issue risk; they are also often advisors in risk reduction and risk management. Many firms view insurance as something to just purchase at the end, once all design is complete. Insurers stress this is a mistake and that clients should engage very early with a specialized insurer, as they can provide bespoke guidance to ensure all projects and sites are insurable and keep premiums lower.

While insurance is thus critical to the deployment and scaling of the cleantech needed throughout the economy, it is important to realize that insurance will not eliminate every risk. To successfully move new approaches from first-of-a-kind to scale, it will require well-developed public-private partnerships for comprehensive risk management. Some risks will remain with lenders and investors, and in some cases, the government will need to assume risks. Carefully designed partnerships can help leverage risk transfer to drive clean technology investments.

Carolyn Kousky

Senior Fellow

Carolyn Kousky is a senior fellow at the Kleinman Center and the founder of Insurance for Good. She is also Associate Vice President for Economics and Policy at Environmental Defense Fund.