‘Energy efficiency insurance’ could increase the attractiveness of retrofit projects in commercial buildings in preparation for the Energy Act, says Paul Cullum.
Paul Cullum
Retrofitting buildings with energy efficiency measures is becoming increasingly important to the construction and facility management sectors. The International Energy Agency (IEA) has recently estimated the global energy efficiency market to be worth at least $310bn (£192bn) a year and is predicting that it will continue to grow.
The proposed implementation of the Energy Act 2011 by the Department of Energy & Climate Change from April 2018 will only add to that impetus and create huge potential for construction companies to become involved in energy efficiency projects. Yet due to the technical nature of the equipment involved and uncertainty over the effectiveness of energy efficiency programmes, lenders and investors often see such projects as an unfavourable credit risk. Faced with this issue, the insurance industry has been looking at ways to increase the attractiveness of these projects.
In many European countries more than half of buildings are over 50 years old, so the potential for improvements to reduce emissions is vast. Thermal window films, roof-mounted photovoltaic panels, LED lighting, more efficient boilers and entire building management systems are some of the measures available to enhance energy efficiency that represent many different technologies and approaches.
Maximum results often require deployment of a full package of individual initiatives, usually at a substantial investment. However, effective programmes can achieve significant reductions in consumption – in some cases as much as 40%. In addition, the per-kilowatt cost of saving energy can be as little as one-third of that of producing an equivalent amount of energy – a simple comparison that underscores the fundamental attractiveness of energy efficiency measures.
The rise of the ESCO
As the expected implementation of the 2011 Energy Act fast approaches, older inefficient commercial building stock will become less attractive and require significant investment to ensure that new leases can be negotiated. Energy Service Companies (ESCOs) are being set up to deal with this increasing demand.
ESCOs assume responsibility for managing a building’s energy efficiency, including negotiating better deals with utilities, installing technologies to reduce energy consumption and in many cases guaranteeing a minimum level of savings. Typically, they set up a separate subsidiary, termed a special purpose vehicle (SPV), to run a given project. The SPV purchases the required equipment, delivers services and guarantees performance according to the contract.
"In the wake of the financial crisis, banks have become uneasy about providing loans for energy efficiency projects. This is where insurers can deliver real value."
More and more construction and facility management companies are identifying this area as a potential source of revenue, and there has been a distinct increase in the number of ESCO companies being set up within the construction sector.
The costs associated with energy efficiency projects can be substantial. They can either be funded by the company (and reflected as a draw on the balance sheet), or an external source of finance can be found.
In the wake of the financial and economic crisis, banks and private equity funds have become uneasy about providing the required loans for energy efficiency projects. They do not necessarily understand the technical aspects of the risk, but see it strictly in terms of credit risk. This is where insurers, using specialist models, can deliver real value by presenting a realistic picture of projected performance and inherent risks.
Reducing the risks
Energy efficiency insurance provides protection for all aspects of the project, ranging from material damage (equipment breakdown) of the installed systems to business interruption (protecting against loss of revenue in the event of equipment failure). The final element, which makes this product unique, is the asset performance insurance covering a shortfall in energy savings. Cover is often available for periods of five years or more.
Energy efficiency insurance is aimed mainly at ESCOs, and the business interruption cover is especially attractive for such an entity, as it protects income from service fees charged for managing energy consumption and revenue derived from local green energy incentives.
Large-scale facility owners such as major companies or government institutions seeking to optimise their energy management are also finding this type of insurance attractive.
With the EU committed to 20% energy saving by 2020; the implementation of the Energy Act 2011 in 2018; and financial institutions looking to invest in energy efficiency projects; the energy efficiency sector is set to grow substantially. By collaborating with energy operators, investors and innovative insurers the construction industry will be well positioned to expand into this growing sector.
Paul Cullum is product development manager at HSB Engineering Insurance
