Energy efficiency insurance complication

Could energy efficiency insurance unlock ESCO market potential?

Slow sales cycles and financial barriers have heavily impeded ESCOs in Europe - Engerati explores the benefits of securing specialist insurance.
Published: Thu 08 Mar 2018

The value of energy performance certificates to commercial and industrial customers is increasingly clear but there are still hurdles to execution.

Customers are slow to sign off contracts with energy services companies providing energy performance contracts (EPCs). Joules Assets Europe, a provider of energy reduction market analysis, tools and financing, estimates that the sale cycle takes between nine and 18 months.

Savings from EPCs can be significant. Nonetheless, commercial energy users are often slow to engage.

Jessica Stromback, Chair and Senior VP of Joule Assets Europe, identifies trust as a key barrier. “The ESCO is selling savings, but how does the customer know if they will actually be achieved? How does the investor know?”

One European tool improving trust is eQuad, an online pre-qualification process that enables small and medium-sized ESCOs to connect their projects to finance and demonstrate the value of their projects to end clients.

The tool is part of the Sustainable Energy Asset Optimisation and Evaluation Framework (SEAF) Horizon 2020 project.

A key service through the eQuad platform is access to energy efficiency insurance - a new concept within the sector that attempts to de-risk EPCs along the entire value chain - for the customer, investor, and ESCO alike.

Jessica Stromback explains: “The eQuad partners identified a significant disconnect between investors, ESCOs and end clients in the energy efficiency market. The platform offers the possibility to easily access third party financial valuation, due diligence, and Energy Efficiency Insurance (EEI).”

The EEI is provided through eQuad by HSB Engineering Insurance, a UK-based insurer offering coverage for energy efficiency projects since 2014.

Insurance enabling financing for ESCOs

Typically, insurance policies are based on potential damage or external event risk factors that may affect an assets performance.

However, HSB’s insurance policies are also providing coverage for business interruption and asset performance - whether the end returns match preliminary expectations.

Designed specifically to deal with the complexity and longevity of energy efficiency projects, HSB conducts a full technical audit of each energy-saving initiative.

Paul Cullum, Alternative Distribution Manager at HSB, explains: “We assess every single energy conservation measure that forms part of a project. We look for not only what is the most likely outcome of that measure, but also what the worst case and best case scenario is, so that we can triangulate possible results across a range of different outcomes.

“We’ve created a mathematical model that runs thousands of years worth of environments to look at what the average outcome of that project is. That then forms the basis of our insurance premium. The more uncertainty, the higher the premium,” he continues.

The results are then applied to an asset performance model to create a credit risk rating, which can be used to facilitate deal closure with investors and clients alike.

The technique is no stranger to the team at HSB Insurance. Cullum says: “We used the performance models that we’ve been working on for 14-15 years, which started in the oil & gas industry with asset performance insurance. We used that knowledge we had from other technologies to create a risk model for energy efficiency technologies.”

So, is the modelling effective? According to Cullum, yes. “So far, it seems to be holding up. We haven’t had to make any significant adjustments to our modelling since we started doing this three years ago. We have seen some claims, but nothing totally disastrous.”

Paul Cullum, Alternative Distribution Manager at HSB Engineering Insurance, tells Engerati's Rose Bundock about a specific insurance product for energy efficiency projects that has levelled the playing field for SME energy services companies.

New opportunities for ESCOs

HSB’s role in eQuad came from having the “investors in mind - what would make them more confident to invest in these projects?”, says Cullum.

“There are a number of customers that we’ve been working with that simply would not have been able to offer projects without the insurance. One example that’s been well publicised is UrbanVault in Ireland, which required performance coverage on LED light installments.”

Joule Assets US-based arm has drawn on HSB Insurance for years in the US, explains Stromback.

“It has been tremendously effective at boosting our sales and investor relations. Bringing insurance to eQuad, it was really about creating that winning combination - evaluating, certifying, insuring, and finally financing the project - to connect all the dots and simplify the sale.”

Already, eQuad has changed the landscape for some ESCO projects.

In their view, eQuad and EEI provide a pain-free way to demonstrate the real value of energy efficiency projects.

“What it brings is benefits to everybody within the energy efficiency chain. We produced our policy with one eye on the investors, but it creates benefits for hosts, ESCOs and investors alike. That’s why we think it will help expedite the whole sales process.”

To learn more about the options for small to medium enterprises and ESCOs to gain insurance, register for our webinar - Selling energy efficiency: Value of insurance and investment to ESCOs, featuring both Paul Cullum and Jessica Stromback.