This paper reviews a “Proposal to Establish a Green Power Insurance Initiative” developed by representatives of the renewable energy and insurance industries, financial institutions, and the U.S. Department of Energy to encourage the creation of insurance that would reduce the price risk borne by developers and marketers of “green power”: electric power generated by renewable energy.

Green power has declined dramatically in price. Worldwide, a declining price has been accompanied by rapid growth, but in the United States, green power has grown only slowly. One reason is green power’s continuing price disadvantage. However, the response to green power products offered by utilities and marketers has shown that many consumers are willing to pay a premium for green power that is large enough to offset the price disadvantage of some renewable energy technologies. Under existing institutions, however, this green premium does not provide an adequate basis for expanding green generating capacity. Consumers purchase green power under contracts with terms that seldom exceed one year, but the lenders who would provide capital for new capacity require assurances extending a decade or more into the future.

The proposed insurance would bridge the gap between consumers’ short-term commitments and lenders’ long-term concerns. A green power marketer would pay a fixed insurance premium. In return, the insurance company would bear part of the risk of a decline in the green premium. The insurance would not cover the risk of a decline in the conventional power price to which the green premium is added.

Insurance companies might someday offer green power price insurance on their own. They are unlikely to do so now. The potential market for the insurance still is small, and limited experience with green premiums would make it difficult to assess the underwriting risk. The proposal would encourage insurance companies to offer the insurance now by partially offsetting its cost with public funds. The federal government would contribute $25 million over five years, and participating states would collectively contribute an equal amount. In return, participating insurance companies would offer price insurance on an agreed amount of green generating capacity — assumed in this paper to be 1,000 megawatts. In addition, the participating states would have a preferential claim to have insurance issued on green power generating capacity located within their borders.

Part of the federal and state contribution — $5–10 million — would cover the cost of setting up the insurance. The remainder would be available to satisfy insurance claims. The total funds available for meeting claims would consist of the premiums paid by insured marketers, the remainder of the federal and state contribution, and the insurance companies’ own capital. The federal and state contribution would be used only if claims could not be met from insurance premiums. Any amount not needed for that purpose would be refunded to the federal and state governments at the end of the program. The insurance companies’ capital would be the final backstop, to be drawn on if insurance premiums and federal and state contributions together proved insufficient.

The paper evaluates the price insurance proposal by addressing four questions: Is it workable? What is its relationship to renewable portfolio standards? Is it cost-effective? What would be the consequences of failure?

The proposal has certain technical requirements. The insurance companies must not satisfy their obligation by insuring capacity that would have been built without the insurance. Further, it must be possible to measure the green premium, which means that it must be possible to determine the market prices for conventional and green power. These requirements may not be perfectly satisfied: some part of the insurance companies’ obligations may be satisfied by insuring “build-anyway” capacity, and insurance may be effectively unavailable for some markets because the green premium cannot be measured. However, these shortcomings are unlikely to be large enough to make the proposal unworkable.

The proposal also depends on the actions of parties that would be affected by the insurance. Insurance companies must agree to offer the insurance; green power marketers must purchase the insurance that is offered and be able to manage the remaining, uninsured portion of the risk; the insurance must induce lenders to provide capital to developers on reasonable terms. Discussions with these companies indicates a strong interest in the proposal. That interest does not guarantee that the proposal would succeed in its purpose. Nevertheless, these discussions and expressions of interest do demonstrate that the proposal is realistically grounded in the industries that it would affect.

A renewable portfolio standard (RPS) requires that a certain percentage of the power sold in a jurisdiction be generated by renewable sources, or by some specified set of such sources. Portfolio standards are directed only at the demand side of the market. They create a guaranteed demand for green power, but they do not do anything to bolster the green power supply needed to meet the demand at a reasonable cost. They may even temporarily increase its cost by creating a sudden increase in demand.

Green power price insurance would tend to compensate for these limitations. It would be available for all renewable technologies and, at least, in all major markets. It is designed to reduce the cost of green power, and it should add continuously to the growth of green power over at least the five years that the insurance companies would be required to offer the insurance.

The cost effectiveness of the proposal can be measured by comparing the additional green power likely to be generated as a result of the proposal with its cost to the federal and state governments. If 1,000 megawatts of green generating capacity is insured under the proposal, the cost per additional kilowatt-hour of green power is likely to be less than 0.1˘ — a tenth of a cent — even if the entire federal and state contribution is needed in order to meet insurance claims. If claims can be met entirely from insurance premiums, the cost is likely to be less than 0.01˘ per kilowatt-hour. For the participating states, the proposal offers the additional advantages of permitting them to achieve economies of scale in developing the insurance that they could not achieve on their own, and offering a cost-effective outlet for the portion of system benefits charge revenues that is dedicated to promoting renewable energy.

The proposal might fail because insurance companies declined to participate, or because marketers declined to purchase the insurance that was offered. In either case, under the terms of the proposal discussed in this paper, the federal and state contributions would be reduced accordingly. The failure would be disappointing, but not very costly to the governments involved.

The proposal also might fail even though insurance companies agreed to participate and marketers bought their insurance, if companies offered the insurance without government support, or if the capacity that was insured was built without the insurance. In these cases, federal and state funds would have been given for nothing.

This is unlikely to occur. It is very unlikely that insurance companies would offer similar insurance now or in the near future without some government support. It is likely that insurance companies would satisfy part of their obligations by insuring build-anyway capacity, but it is unlikely that so much of their obligation would be satisfied in this way that the proposal would have to be construed a failure.

The proposed price insurance might not reach all its goals. If it fails, however, this is unlikely to be costly to the participating governments. And the risk of failure is outweighed by the potential for creating an institutional basis for consumer-driven expansion of the green power market.

Abstract A Message from the Staff of the Renewable Energy Policy Project Article