New Pilot Program for Climate-Related Projects: Insurance for Energy Savings

HIGHLIGHTS:

• "Insurance for Energy Savings" is one of four ideas selected on Oct. 20, 2014, for a pilot program by the Global Innovation Lab for Climate Finance to facilitate the "next generation" of financial products for climate-related projects in developing countries.
• The Lab was launched in June 2014 by the UK, U.S. and German governments in partnership with other large donor countries and private sector representatives.

"Insurance for Energy Savings" is one of four ideas selected on Oct. 20, 2014, for refinement, stress-testing and preparation of a pilot program by the Global Innovation Lab for Climate Finance. The Lab was launched in June 2014 by the UK, U.S. and German governments in partnership with other large donor countries and private sector representatives. Its mission is to facilitate the movement of private investment into climate-related projects in developing countries through the design and pilot-testing of a "next generation" of financial products. The Lab issued a general call for ideas earlier in 2014, culled the preliminary list of 80 submissions down to seven and announced the final four winners at its Oct. 20 meeting in Venice, Italy.

Intended Users Include Building Owners, Energy Efficiency Service Providers and Lenders

The central idea of "Insurance for Energy Savings" is the establishment of a standardized insurance product that will pay compensation if anticipated financial flows from energy efficiency (EE) projects do not occur. Intended users include building owners and EE service providers, as well as lenders to their projects. The economic premise is that the cost of insurance coverage will be significantly less than the EE savings, while the additional security provided to a bank (which could be the counterparty entitled to make claims under the coverage) would encourage the funding of projects. As with many initiatives in the "green finance" area, successful implementation will depend upon the continued development of widely accepted standards for technical audits, contract provisions, monitoring and transparency.

While the insurance proposal was principally formulated to encourage local bank lending in emerging markets, there is no reason that use of the product may not be considered in other contexts. For example, it could be used as a credit enhancement to support and stabilize revenue streams in a project finance structure or in a solar securitization of commercial and industrial EE improvements. More reports from The Lab on this product and others in development will be released in the coming months.