The path to ESCO success - energy efficiency investment and insurance

Presenting key learnings from our recent webinar, Engerati explores ESCO projects in Europe, including how they used innovative financing and insurance solutions.
Published: Fri 13 Apr 2018

European energy service companies (ESCOs) have been given a new lease of life in recent years.

Between increased funding and regulatory drivers for energy efficiency, the demand for services has continued to rise.

The delivery of these services, however, may be falling short.

Facing slow sales cycles and hard sells on smaller projects, small to medium enterprises (SMEs) in particular may find projects prematurely shelved.

These delays are a barrier that Joules Assets Europe, a provider of energy reduction market analysis, tools and financing, has striven to ease.

As part of the Horizon 2020 Sustainable Energy and Asset Evaluation and Optimisation Framework (SEAF) project, Joule Assets led a project uniting a wide variety of entities with the singular aim of increasing access to finance for ESCO-led energy efficiency projects.

The result of the collaboration was eQuad, the online pre-qualification platform.

A key service through the eQuad platform is access to energy efficiency insurance.

In an Engerati webinar, “Selling energy efficiency: Value of insurance and investment to ESCOs”, we discussed the unique opportunities within eQuad with specialists from Joule Assets and their project partner, HSB Engineering Insurance.

eQuad’s assisted finance for ESCOs

According to Jessica Stromback, Chairman of Joule Assets Europe, the process of eQuad serves “to standardise the first few stages of the financing process and add certain critical elements that currently aren’t necessarily there.”

In the earliest stages of eQuad’s pre-qualification, strides are taken to ensure projects are presented in a professional and clear manner - that whatever they present to financiers is comprehensive and streamlined.

The second portion of the process, perhaps the more unique eQuad offering, is ensuring that the project has been reviewed by a standardisation body, such as Investor Confidence Project accredited quality assurance providers.

Stromback sees this process as instrumental to the development of energy efficiency projects within SME ESCOs.

She says, “by the time that project has been evaluated, reviewed, presented in a standardised manner, the due diligence is in order and it has an insurance quotation from a internationally recognised insurance provider, it’s a completely different animal than a local SME trying to approach a €100m fund on its own.”

In this Engerati webinar, Paul Cullum, Alternative Distribution Manager at HSB Engineering Insurance and Jessica Stomback, Chairman of Joule Assets Europe discuss the benefits of EE insurance to the industry. 

Pre-qualification enabling ESCO success

Not only does this qualification provide backing for ESCOs, but it helps them to develop confidence with their client as well.

One example Stromback cites as a demonstrator of eQuad’s success in mitigating costs for energy efficiency projects was a client in italy retrofitting residential apartments.

With a current portfolio of €1m and an internal rate of return of 15%, the project was successfully matched with a French fund.

After securing specialised insurance from HSB, which focuses on business interruption and asset performance, these smaller, unusual project with smaller portfolios gain greater access to investment opportunities.

The results don’t just benefit the ESCOs, either. From the investor perspective, projects come to them with much lower processing fees and are more immediately viable.

So how do the insurance policies come together?

Paul Cullum, Alternative Distribution Manager at HSB Engineering Insurance, describes the process for ESCOs utilising EE insurance. 

Creating energy efficiency insurance policies

Paul Cullum, Alternative Distribution Manager at HSB, explains what is taken into account when formulating an insurance policy for energy efficiency projects.

  1. Equipment damage - the assets themselves that are being implemented as part of the project.
  2. Revenue - ensures that the ESCOs themselves have cover for general revenues or incentives generated throughout the project.
  3. Asset performance - ensures the savings predicted by the ESCOs, where shortfalls are covered by the insurer.

Whilst the first two elements, to Cullum’s knowledge, are standard for these kinds of policies, the asset performance guarantees serve as a new and exciting opportunity for ESCOs.

Cullum explains, “what we wanted to do was create a product that wasn’t reliant on damage. We’re covering asset performance as a result of defective design, simple miscalculation - there doesn’t have to be a particular event behind the shortfall, just the shortfall itself.”

Using a mathematical model that runs thousands of years worth of environments to look at what the average outcome of that project is, the insurance premium is formed based on how much uncertainty a project poses.

This premium is then applied to a credit risk model, where the real benefit of insurance for these projects comes in - credit risk enhancement.

Cullum says, “If you take a project, it will have an inherent credit risk rating. If you take a project and transfer the risk to an insurer which has a much higher credit risk rating, that creates an inherent improvement in the rating for the ESCO.”

He continues, “What we’re doing effectively is bumping up that rating, which means there’s a reduction in the cost of capital. This enables financers to get better returns on investments as well as getting better rates of investment for ESCOs themselves.”

On-demand webinar available now

For more insights into the state of affairs for ESCOs and energy efficiency, register for our Engerati webinar “Selling energy efficiency: Value of insurance and investment to ESCOs” on-demand now.