How technology performance insurance supports the rapid advancement of climate tech

How technology performance insurance supports the rapid advancement of climate tech
(Photo by Evgeniy Alyoshin on Unsplash)

Contributed by By Jan Napiorkowski Managing Director, Ariel Green

Back in 2009, the European solar industry was poised for explosive growth. As the global economy struggled to recover from the Great Recession, a host of government policies took hold that accelerated the industry.

At this time, solar manufacturers had a growing concern about the large liabilities building up on their balance sheets tied to long-term performance warranties.

These companies, mostly monoline businesses and some part of larger groups, had no parental guarantees to keep long-term obligations off their balance sheet. That proved to be very expensive. Ultimately, they wanted to transfer that warranty risk, and insurance was an obvious option.

The request for insurance made a lot of sense. After all, solar companies were asked by auditors to keep major reserves on their books in case something went wrong with their products. They had to make good on warranty claims. This tied up capital, stifling their growth potential.

By shifting technology risk to an insurer, they could spend a lot less overall by getting insurance policies that would allow them to release their warranty provisions while maintaining an investment-grade reserve.

This helped enable Europe’s solar businesses to grow and realize the sector’s immense potential.

GO DEEPER: Jason Kaminsky, CEO of the clean energy project insurance provider kWh Analytics, joined Episode 51 of the Factor This! podcast to share the data behind solar’s biggest risks, along with pathways to avoid potholes down the road. Subscribe wherever you get your podcasts.

That’s the origin story for the product I helped to create, which has come to be known as technology performance insurance and is now globally available. The application and buying motivation spread into other cleantech sectors, and to other stakeholders in the value chain holding various liabilities for their performance warranties.

These kinds of policies are now widely written across the industry. They have come to be important tools to advance the market viability of some of the most exciting tech developments that will decarbonize the energy sector.

I estimate that to date, the insurance industry has insured at least $35 billion worth of assets globally with this method, covering most clean energy technologies. The impact has been to accelerate innovation in solar, energy storage, fuel cells, hydrogen, and bioenergy — all to help curb climate change.

How technology performance insurance works — and the potential benefits

Insurance premiums have certainly become a growing item in a developer’s cost stack. But that is typically for traditional physical damage property policies, whose premiums may have risen because of years of poor underwriting decisions in the past.

Technology performance insurance is different from the catastrophic insurance policy that a homeowner or business owner might buy to protect against a storm or fire. It is bespoke, not commoditized, and thus doesn’t follow those market trends. 

Traditional insurers are good at looking at historical data and trends, and then writing policies to cover claims that stem from those kinds of events. This is referred to as retrospective underwriting — assessing risk based on what has already happened.

In contrast, technology performance insurance involves forward-looking, or prospective underwriting. We rely less on past performance data and a lot more on technical expertise. This means we need a team of expert engineers and technologists, who have deep backgrounds and extensive industry experience, mostly in chemical and mechanical engineering.

Emerging cleantech solutions typically lack an operating history; after all, they are new. That means our technical team collaborates closely with clients and industry experts to understand how technology is evolving, and what new materials and processes are being introduced that will affect long-term performance. That way we can qualitatively assess and quantitatively model with what degree of volatility the technology will operate, once placed in the field.

It’s important to remember that the world operates on probabilities, not certainties, a truth that many tech providers and yield feasibility models often overlook. When models assume that technology will behave or degrade in a linear fashion, variability is ignored. This oversight can imperil projects when underperformance creates a significant gap between expected and actual revenues.

These are the gaps that technology performance insurance is filling as it covers a degree of technology’s expected performance. At its core, we are providing investment-grade capital to back up the technologies that will lead us to a net-zero future.

What started out in 2009 as a straightforward way to help companies de-risk their balance sheets is now a critical tool to help companies speed emerging technologies to market, and provide long-term guarantees that their environmentally preferred solutions will continue to work as designed.

In practice, a typical client provides us with an estimated production level for the duration of the policy, and what percentage of that they seek to insure. We review those numbers, work to understand the technology, and then — if it all makes sense — write a policy that endorses an agreed level of production.

Silicon Ranch and Sulphur Springs Valley Electric Cooperative completed 20-megawatt McNeal Solar Farm (Photo: Business Wire)

Some clients ask us to backstop operational cash flows that are used to service debt. In that case, underwriting around 60-90% of the expected performance may be enough, depending on how much debt the investor is willing to put into that technology even with insurance.

Other clients need to protect an O&M performance guarantee. In such cases, it may make sense to underwrite a larger portion, say 95% of the expected output or more, when underwriting a large portfolio of assets.

The cleantech sector is still relatively young, and most companies’ performance warranties aren’t backed by balance sheets with much of a credit rating. But they need to support loan terms and other stipulations. We represent a potentially massive boost to the sector by providing investment-grade warranty backstops.

That backstop often can move the needle significantly when it comes to the cost of financing. Just how far is project-specific; however, our experience suggests that technology performance insurance can improve the cost of funding anywhere from 50 to 250 basis points. For highly novel tech, this insurance can even enable debt into the project, which is needed to attract equity and bring a project to fruition.

Especially in an era of high interest rates and uncertain finance, technology performance insurance is playing a significant role in propelling the cleantech industry forward.

Jan Napiorkowski helped introduce technology performance insurance in 2009. Today he is Managing Director of Ariel Green, the clean energy division of global (re)insurance business Ariel Re, which recently rebranded to recognize the increasingly crucial role of such insurance in climate action.