Catalyst with Shayle Kann - A critical tool for scaling climate tech: insurance

Episode Date: February 17, 2022

We buy insurance for everything – our cars, our houses, our health. But climate tech insurance? That’s a new one.   When Jeff McAulay was working in solar, he discovered one major roadblock to scaling up climate tech. Solar developers didn’t have the right kind of insurance to cover their risks. So Jeff co-founded Energetic Insurance.   Turns out, insurance solves problems beyond solar. Jeff says there are unaddressed risks associated with many new climate technologies that can prevent developers from accessing affordable capital. In essence, Jeff sees insurance as part of the larger capital stack, alongside better-understood tools like venture capital and debt. In this episode, guest co-host Lara Pierpoint speaks with Jeff about applications in heat pumps, fuel cells, geothermal, advanced nuclear and more. They also discuss the limits of private insurance, and the role governments can play in addressing uncertainty, technological complexity and regulatory hurdles.  They also cover moral hazard and how insurance companies could change the market. Will insurance companies continue to offer catastrophic insurance in wildfire-prone areas, or coastal areas prone to hurricanes? Will they continue to insure coal mines and coal-fired power plants? And Lara asks: Will insurance companies be able to adapt their models to the changing risks of climate change? Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you're a startup, investor, enterprise, or innovation ecosystem that's creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Catalyst is supported by Nextracker. Nextracker’s technology platform has delivered more than 50 gigawatts of zero-emission solar power plants across the globe. Nextracker is developing a data-driven framework to become the most sustainable solar tracker company in the world – with a focus on a truly transparent supply chain. Visit nextracker.com/sustainability to learn more.

from the studios of PostScript Media and Canary Media. I'm Larry Pierpoint, and this is Catalyst. There is essentially unlimited capital right now that's trying to get into ESG. It's amazing. It's a wonderful thing to see. So much capital from all around the world is trying to pour into renewable energy. We just have to create the right risk profile, and it can really take off. But it's not easy to start an insurance company. It's not easy to write an insurance product.

It's hard to do this stuff. What if insurance, yes, insurance, could be a powerful ally in decarbonizing the economy, really helping us to actually get to scale a little bit faster on deploying early commercial climate tech. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on,

coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast,

Critical Capital. Each episode, I talk with people deploying capital, shaping policy, and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital Capital on Spotify, Apple, or wherever you get your podcasts. I'm Larra Pierpoint, filling in for Shale Khan while he's on family leave, with huge congrats to Shale and family. And the director of climate at Actuate, which is a nonprofit focused on systems innovation to scale greenhouse gas emissions reductions. When you're making your list of the 20 most important, powerful solutions and forces that could enable greenhouse gas mitigation at scale, I'm going to go ahead and guess you may not start with the word insurance. But Jeff McCauley does. He saw that there were lots of buildings that would be

great candidates for solar, but couldn't get it. Why is that? There are a lot of businesses buying solar electricity, but many of them who would like to have solar, unrated, or below investment grade. Because of those challenges, they have a hard time getting financing, even though solar would save them money in the long run. So Jeff started a company to address this problem. It's called energetic insurance. It's growing, and as it does, Jeff is getting a front row seat into the ways that insurance could actually enable transitions to infrastructure that help save the climate. For most of us, when we think about climate insurance, we think about how we're going to pay for the increasing costs of climate disaster-related damages.

The size of this market is staggering. To put some numbers on it, the global insurance sector is worth about $5 trillion. Insurance companies earn roughly $1.6 trillion in premiums for property and casualty insurance, which is the type that often pays out after a climate disaster. Swiss Re, one of the companies that insures the insurers, estimates that the global risk full for property, driven largely by climate, will grow 33 to 41 percent by 2040. This is insurance as we typically think of it, and it's huge. But maybe insurance doesn't just play a role in the climate response side of the equation. Could it actually help usher in climate mitigation solutions? Think reduced cost insurance to help advance clean energy technologies build their first projects, or insurance to help companies cover demand-side risks as they're scaling up and developing a customer base. Jeff and his team at Energetic have thought about all of this and more. So today we spent some time demystifying the role that insurance plays in climate tech development and deployment.

We also talked about what can be done to better harness insurance for greenhouse gas mitigation at scale. So here's my conversation with Jeff. Hi, Jeff. Hey, Laura. Good to see you. So great having you here today. So let's get into this. So you and I went to graduate school together.

And in graduate school, you were a vehicles guy. We had a lot of conversations about flex fuel, ethanol, stuff like that. You've had a really interesting career since then in the Frownhofer Institute, among other organizations, really focused on all kinds of different aspects of climate tech. So I have to ask you, what got you into insurance? What was the point at which you were like, this is the piece of the climate system I want to work on? Not this technology stuff necessarily as directly, but really the insurance piece. What got you there? That's a great question. And I think that, you know, grad school, Jeff from, you know, 10, 15 years ago would also be surprised. Not at all what I would have anticipated. But looking back, it's actually not as far as you might

think. And there are indeed a lot of engineers who work in the insurance industry. And, you know, what I started my career in very early on was in trying to de-risk technologies. So for me, that started off in fuel cell and catalytic fuel forming systems where I was trying to do accelerated durability, accelerated aging. And one of the key things that I did as an engineer that engineers do is look at FMEA analysis, very mode and effects analysis, which is a list of everything that could go wrong and how bad it is.

And here I am in the insurance industry now, and they're engineers and actuaries who do the same kind of analysis, looking at frequency and severity of something going wrong. So it's a, you know, started my career in de-risking technology from an industry, an engineering perspective, and now finding other mechanisms and model

to do risk transfer, but de-risking for the project developers and financiers. I love it. I mean, that makes a lot of sense, and that resonates with me a lot because I've thought a lot about risk and, like you, really passionate about scale and about getting things out there and solving the problems we really need to solve. But let's talk about you specifically. What was it that got you to the point that you thought insurance might actually be enabling for climate tech deployment, and what got you into the moment where you started this company, energy insurance. It's a great question and definitely a bit of a journey from from engineer to insurance. I think for me it was all about trying to solve problems and deployment. And the question

became, where is the bottleneck? What is holding back the market? And we can look at de-risking technologies. But in solar for me and my co-founder and many other folks in the industry, it was a realization that technology risk wasn't the risk that was holding back deployment. It was something else. And so as we, you know, push deeper into that question, it really came down to counterparty risk, which is kind of a funny thing. It's great from an engineering perspective. It basically means that your technology can outlast your customer, which is kind of a nice problem to have if you're coming from the engineering side. But for the for the financiers, they say, well, okay, that's great that you're signing a 20-year PPA, who's going to be around for 20 years, even 10 years?

And so that works for utility scale. It works for municipalities. It works for even some of the large tech companies. But we want this to be distributed generation, right? So when you're in a plane and you're looking down at all those roofs, how many of those are on Fortune 500 companies? There's a lot of rooftop area out there that just doesn't really fit well in our current framework for renewable energy financing. That's true if it's solar, if it's battery,

if it's a heat pump, all of these distributed assets that are so exciting are generally sold on long-term contracts. And so even once we've wrung out the technology risk, there are still counterparty repayment risks that are holding back financing for those projects. And so that's really what energetic is all about is taking on that counterparty credit risk to enable deployment. That's awesome. Okay. Well, we'll definitely go. into all of the details and pull a bunch of the threads that you just started there. But I think let's start with kind of the bigger view about what really even are we talking about here. So, you know, again, you're somebody who's not exactly an insurance industry incumbent

or someone who's affecting the insurance industry from the outside in some ways. But tell us, like, what really are we talking about here? What is the scope of the insurance industry and what are some of the features that we should be most paying attention to if we care about scaling climate technology? Great question. And I guess it's difficult because the insurance industry is so massive. I think we're talking on the order of a couple trillion dollars in annual premiums. So most people who are listening to this have, you know, regular experiences with insurance. You've, you're inundated with auto insurance ads or, you know, everybody has health insurance, so, or homeowners are insurance. So I think it's

something that's woven into part of our daily lives. And, you know, I did and I think most people would just, think about this is something, well, you just kind of have to buy it. If you, if you own your home and you have a mortgage, you have to have homeowners insurance. It's not really an option. If you, you know, drive a car, you have to have auto insurance. It's not really an option. And so I think people will, people probably just think about it as a, just a normal everyday thing that you have to have to buy. And we're looking at this from a slightly different perspective, not just the personal everyday lines, but something that can be used really in deployment of assets and almost an enabling technology where we societally, you know, capital we, as in, you know, we the people,

want there to be more renewable energy assets out there in the market. And if there are risks that are holding back deployment, how can insurance be used to transfer those in a cost-effective way to get the lowest cost of capital for renewable energy deployment. Right. So let's go ahead and get into that because, yeah, I mean, I think you pretty much said it, right, that my view of insurance coming from a real layperson's, you know, perspective on this is that insurance is generally something you don't want to deal with. It's kind of a big pain if there's some event that precipitates you needing to talk to insurance folks. At the best, it's kind of a box check that you don't have to think about. But we're talking about something really different here. This is really insurance as a way to actually get us more of the climate technologies we think we need. And I think this is a really common pattern that you see with climate tech, is that the risks appear at least to be higher. But in some cases, there are real benefits to be had by deploying some of these things. So maybe we can talk a little bit specifically about energetic insurance and about the specific problem that you guys identified in solar and how you went after that. Yeah, absolutely.

So really, the inspiration for energetic is around the lived experience of trying to work on project deployment. So initially, that was behind the meter, C&I. solar and storage and working back at what was then Enternaw, which is now an LX, and realizing that despite seeing tens of thousands of large commercial and industrial customers, that those were largely inaccessible for solar project finance. Again, this is your standard third-party-owned PPA structures. And that's a lot of the market that is very difficult to access. And so seeing that insurance could play a role in enabling debt financing in particular to flow in at the project level.

One of the key enabling insights for me is really seeing the LCOE calculations for renewable energy, which is levelized cost of electricity. One of the biggest levers is actually the cost of capital. And so there are, you can get various sources of capital for profit. but it's not just accessibility, it's what that cost is. And a way to think about it is the risk adjusted rate of return, risk-adjusted cost of capital. So if you want to get lower cost of capital, you have to adjust the risk. Well, how do you adjust the risk? Project finance is all about efficient allocation of risk to various parties. If you can get, you know, the off-taker takes some, the developer, the project takes some, the bank takes some. If you can show,

shift risks that are not efficiently allocated to an insurance balance sheet that may allow the total cost of capital to fall for the project. And that directly impacts LCOE that expands the market, that potentially lowers costs, potentially accelerates for everybody. And so seeing that magical piece come together was really inspiring and started a long journey. We were ultimately able to secure backing from one of the largest reinsurers in the world. And here we are five years later and enabled to grow in these markets, which is really exciting. So let's get specific about this, because we're talking about solar on rooftops largely for businesses. Is that right?

Yeah, initially. What are the particular risks that you are transferring? What was the problem before? Why weren't they efficiently allocated? And what is it that your company is doing that changes that? Yeah, it's a great question. So when we think about solar, it's a very simple case. You've got a number of risks in terms of that project.

So one would be something like, is the sun shining weather risk? We can then translate that into hardware performance risk. Does the module perform? Are the photons converted into electrons? Most of those are generally very well understood. Their existing insurance products are many project finance entities are comfortable bearing that risk. Then we get to the question of the counterparty. And if you have a highly rated utility counterparty,

then generally financiers are comfortable with taking the, you know, 10 plus year offtake risk. But in the development landscape, everybody knows it's all about a bankable off taker. What does it mean to have a bankable offtaker? It means that you can trust that they're going to repay if the kilowatt hours show up, that the dollars show up in that power purchase agreement. And so that's really what we're focused on and analyzing the repayment risk of that commercial counterparty. And where we look at this is saying, yes, of course there's credit risk. And we've seen, you know, generally goes in cycles. But we have an alternative hypothesis on the repayment stream because of the

differences around electricity. Electricity is fundamentally a different type of repayment. It's a different type of commodity than other bespoke types of lines of credit. We use that in our underwriting models to be able to, what we think is, efficiently price and transfer the risk. So this is an example. You guys have cracked the code, and this makes a lot of sense for solar, that you're really kind of working on this demand side credit risk issue. And solar, of course, is an interesting example, because as you said, when it comes to risks associated with the performance of the technology or weather, kind of other impacts like that, that, you know, there isn't really a lot of risk, or at least the risk that's there is pretty well understood. So is this idea that we can kind of transfer risk

and do some different things with insurance? Is it applicable beyond solar? Is it applicable to technologies say that have some substantial tech risk, and maybe if you can give us an example of something where that might be the case. Absolutely. And it's important, we're a member of, I would say, a growing group of insure tech or data-informed software companies that are looking at different data streams, different risk models, different performance mechanisms. And not everybody uses the word insurance, but it is about risk management in renewable energy. And so there are several examples. When it comes to performance risk, there are folks like KWH or Omnidian who actually, you know, take on that risk of asset performance, new energy risk, which focuses on some of the technology risk for earlier stage technologies.

And many more that risk is, that list is growing. So in terms of technology risk, there are definitely still earlier stage technologies that are coming out. And even for mature technologies, many times there are extended warranty programs for even things like heat pumps, where the manufacturer might have a five-year warranty, but the project term is 10 years. So there are a ton of resources that can help project financiers get those deployed cost-effectively. Great. Thanks, Jeff. So beyond heat pumps, let's get into maybe a specific example of a technology type for which there was a challenge associated with scaling and where risk was transferred. Insurance really kind of came in and helped change something about the scaling equation for that technology. It's a great question. And it's too soon to declare victory for sure. But we see these all the time. And there are many other companies like Energetic that are working on trying to understand some of these new. cutting edge risks. An example that comes to mind in geothermal where a lot of the risk is really around the success of individual wells. And there's an open question as to for every 10 wells that are drilled, how many of those are going to be successful. And so there are emerging insurance projects out there that are focused on this kind of drilling success coverage. I think it's primarily

in Kenya at the moment where this is being launched in collaboration with some of the the DFIs, but this is where we have an opportunity for public-private partnerships around covering risk to enable maybe some newer technology or newer exploration

risk. You want more. Other example. I don't know, pick your favorite technology. Let's talk. Let's talk nuclear. Can insurance help nuclear? Maybe. So in general, insurers are very,

afraid of nuclear risk. There's a common nuclear exclusion in many policies. But, well, it's, Laura, you're the expert, but why is there so much concrete associated with nuclear power plants? Isn't that where the cost comes from? It's a big piece of it for sure. And so I'm guessing that's because there's a safety factor. Yep. Absolutely. You have to have a lot of thick concrete to protect the public. Yeah. So if you could reduce the risk, would that be able to reduce the cost? Oh, man. Well, now you're asking a regulatory question, too, Jeff, because this is sort of the million-dollar regulatory question in the advanced nuclear industry, and this is a whole other conversation. But ideally, yes, that would absolutely be part of, you know, the revolution for advanced nuclear reactors.

So what would enable a distributed, for the distributed modular nuclear reactors, are they somehow inherently safer? Some of them, yeah, absolutely. There are definitely new technologies that make them safer to operate. So I think this is an opportunity. I'm not saying I want to go take on nuclear power plant risk, but to the extent that you think you have a mispriced or misunderstood risk, where you can say from an engineering perspective, look, the risks are vanishingly small, and even the consequences, if something were to happen, are measurably low, that could be an opportunity. Now, I think the appetite for a private insurer to take that on might be low. However, this could be an area for potentially a government collaboration where they're able to insure risks to enable some of these newer technologies to come to market without being burdened necessarily

by some of the costs. We're going out on a limb here, right? So, you know, the headline should read, Jeff says insurance is the solution to all of nuclear powers. Like, that is not the headline here. But, you know, in general, we look for where they're misprice risks. Where is there something where, from an engineering perspective, you can understand that it's low, but maybe there's a perception that in the market that it's higher.

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and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy.

Join me for my brand new show, critical capital. As I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. Well, so let's break this down a little bit and kind of give everyone a sense for, you know, sort of how to think about insurance as an enabling piece of this. So you've talked a lot about finance. So clearly this is about, you know, reducing the cost of capital. It's about kind of a piece the finance tax. So can you say a bit more about that? Like, how do you think about insurance

relative to other elements of financing? Yeah, absolutely. And when it comes to project finance, we definitely see finances fuel, especially in renewables. You don't have fuel costs. So going back to this question of LCOE, it really is that cost of capital that's one of the main drivers. I think when it comes to impact or climate, people are generally familiar with VC investments. This is a well-understood sector, and everybody gets excited about the press releases and startups raising tens of millions of dollars. And that is important from an existential perspective. But let's say that company is making widgets. At some point, they're going to transition from that venture capital funding, and they're going to want to fund projects.

So that comes in the case where the customers are not just buying the widgets for cash, where there's a, a project entity that owns that asset that then sells a service. And so we see this power purchase agreements, solar as a service, you know, energy services contracts, ESCOs, efficiency as a service. These are setups where an entity owns the asset and sells that service to the end user. That requires a different kind of financing, but it's super impactful. So VC is to get the company running, but then you want project finance to be able to set up the deployment. And it's very attributable because you're seeing a dollar that goes into project finance literally goes to a project somewhere that you can see for a customer whose benefit you can see.

Now, that project finance, in general, if you're trying to reduce the overall cost of capital, it makes sense to start bringing in debt. So generally, you've got sponsor equity, debt, maybe tax equity. And the overall metric of success there for that developer is going to be their levered IRR, which means they want to get the best terms on debt possible. And again, thinking about this risk-adjusted rate of return, it means adjusting the risk for those lenders such that they can, the project developer can get the best, let's say, longest amortization, highest loan to value, tightest DSCR. There's a number of levers that can be pulled there. And generally,

those banks will require certain risks to be covered, either in a a reserve, a letter of credit, a warranty, an insurance policy. There's a variety of things. And so it's because of that mix, we see insurance almost like a participant in the capital stack. It's a collaborative effort between the sponsor equity, the debt, and the insurance to try to figure out how to cover off the risks efficiently to get that lowest overall cost of capital to get these projects done quickly and efficiently at scale. So we're a really basic question here, coming from someone who understands the tech world much better than I do the finance world.

But so it seems like there are some challenges within the climate tech space that we're not allocating risks efficiently right now. And part of what your company does is seeks to do that. And in doing so is really enabling some interesting projects. But why aren't they allocated efficiently in the first place? It seems like it's in everyone's best interest within the financial system to do this right. So what's the hang up here?

It's really hard. I think, you know, and you could go into, I'm sure, jargon fest on any number of different projects. But it's another language. It really is. So when you talk to a project developer, you got S-Rex and Z-Rex and Net Metering, NM2.0 and 3-point. It's like it's absolutely very complex. And utility rates and regulations vary by state, sometimes by. utility territory. It's very, very difficult. This is the farthest thing from a homogeneous market

that you're going to find. And so, yes, there is capital out there that's willing to do these projects. It just, the more complex it is, the higher the perceived risk, the more that those smart people expect to get paid for putting their money at risk. So I think there is capital out there, and it's just a matter of, again, trying to make this more of a standardized risk package so that a lower interest rate, maybe lower risk source of funding, can kind of check the box. There is essentially unlimited capital right now that's trying to get into ESG. It's amazing. It's a wonderful thing to see. So much capital from all around the world is trying to pour into renewable energy. We just have to create the right risk profile, and it can really take off. But I think

we're not coming in saying, you know, I think other people understand the way, the way we do, but it's not easy to start an insurance company. It's not easy to write an insurance product. It's hard to do this stuff. And, you know, there are lots of folks doing it, but it doesn't come automatically. Yeah, that makes a lot of sense. Okay. So what I'm hearing is that, you know, probably among other issues, two big ones, one that insurance is really kind of a localized market, and there are a lot of, you know, different conditions that may lead to things looking a little bit different across the country. But also, this is kind of one of those classic arenas where engineering meets finance. And so it's really, you know, you've got to find the people who can

really speak both languages really effectively to do this well. So you mentioned that, you know, outside of solar and in some of these places where there's some tech risk, that there are some companies who are stepping in and trying to solve these problems. So can you give like an example of some kind of new technology, maybe a case where there's a little bit of performance risk where you've seen some progress and there's been some financing going in places that it should, thanks to more efficient risk allocation around insurance. Yeah, absolutely. And I think this is one of the hardest parts is the early-stage tech risk.

And in many cases, we see public, philanthropic, or even state governments, federal governments, that are stepping in to try to alleviate these risks. Those generally happen with loan loss reserves or pilot programs. and those demonstration projects are often used to try to wring out some of those technology risks. Because even for insurers, there needs to be a certain level of scale in order to see, okay, this is worth it. But there are, I mean, I think there's a lot of active insurers and reinsurers that play a role here. In particular, Munich Re is very much a technology underwriter. AXA, and as I mentioned before, new energy risk. Also on larger scale projects, I think bloom fuel

cells is a key example where that's been really a success story. I don't know that we would necessarily call that new technology anymore, but still, it's been a huge help to get them started. Yeah, I mean, that makes a lot of sense. This is kind of a classic issue we see over and over in the climate tech space, is this chicken or egg problem of, you know, you can get low-cost financing, you can get great contracts if only you have a track record, but then you also can't can't build that track record unless you're able to build some projects. So let's say a bit more about what you just mentioned, that this may not be just about insurance, but that there are ways that you can kind of combine some approaches to insurance maybe with government

or philanthropic funding. How would that look? Yeah. Well, there are some risks that are important for society, but are hard to price or hard to write from private sector. And so we see this as oftentimes the role of government. So I guess key examples, there's USDA loan guarantees, SBA, small business administration, loan guarantees that enable financing in other sectors. USDA in particular has been used in solar project finance. And then outside of renewable energy, people may be familiar with a national flood insurance program. In California, there's an earthquake, a state earthquake fund. So there are lots of cases where state or federal government funds step in,

on risks that are hard, hard to ensure. And we see an opportunity, especially internationally, with development finance institutions, DFI's, development banks, to share in risks associated with project finance and really work together to make both public and private sources of capital work efficiently together to help scale renewable energy. I mean, this is sounding really cool to me. I think, you know, it certainly makes a lot of sense that the government might step in and sort of provide backstop insurance in certain cases like this, particularly to deploy new renewable

energy. But is that something that's really being done? You know, I think about like the loan programs office and all the really cool things that particularly right now they're doing for finance of climate tech. But is there anyone or any organization that's really pushing for the government to support insurance directly as a piece of enabling, you know, technology in some ways to get more climate tech out there? LPO is probably the best example. And obviously, jigs, is a great spokesperson and leader for the organization. So I couldn't say it any better than he could. But even LPO needs risks covered.

And there's a very extensive due diligence process to go through to make sure that those risks are covered off effectively. And I know that there are multiple other offices within the government that are looking at these kinds of efforts, both at the federal and the state level. And it is really needed, as you said, for those earlier stage projects, or even the mature technologies, to go into more equitable avenues. So places like, you know, are we making sure that distributed generation goes into low-income housing,

for example? Are we making sure that there's equity in this deployment, not just making sure that it's only the 750 FICO's that are getting solar? So that's really important from a mission perspective. No, that's a really great point. I'm glad you touched on that, because this is, you know, really one of those one of those key moments where we're recognizing how much benefit there is, not just directly to public health, but to things like, you know, consumer bills and how important it is to include the equity angles we're thinking about these transitions and using tools like insurance to really enhance equity. So that's a great point. Yeah, and it's mutually reinforcing. If we think about the storms that have come through in Texas or even going back in New York or the Mid-Atlantic,

and certainly in California, there's an opportunity. for distributed generation to increase resiliency. So a lot of the damage in Texas was caused from frozen pipes or cold temperatures when the power went out. So if we imagine now that there's more accessible financing for distributed generation, that increases the resiliency of those homes and businesses, which reduces the damage due to those storms.

So we can see that this is actually a virtuous cycle on multiple levels. So what I'm hearing here is really just a clarion call for like a brand new public advocacy organization solely focused on insurance and getting the federal government to support more in that arena. Is that right? If you're fired up about it, that's great. I won't advocate one way or another. Just say we want to help do more projects in more places. I mean, that sounds pretty good to me. Okay. Well, so we've talked a lot about the benefits of insurance and ways that it can really help support, you know, transferring risks and ultimately scaling some really important climate technologies. But what are the challenges here? I mean, is, you know, really insurance kind of the answer to all of our problems? I think probably not. But so tell us about some of the challenges with leveraging insurance as a way to kind of shift risks and get more deployment. Yeah. Well, we mentioned a couple before for sure, and one is complexity. One, in the underlying projects, these are different technologies, different regulatory environments, different incentive streams, whether it's Rex or LCFS or 45Q or pick your favorite alpha numeric,

acronym, these are complex markets. And even as we introduce new incentive schemes, there's uncertainty in the value of those incentives over time, even carbon credits. Great, there's a value on carbon. Okay, how do I price that forward strip of carbon credit out five, ten years in voluntary market? So there's lots of risk management opportunities, even as we're getting more and more nuanced. So complexity, uncertainty into the future, and just the regulatory hurdles, there are plenty already for project finance. Those are there for good reason. There's also regulatory hurdles in the insurance markets also there for very good reasons. But it just means that a lot of this happens maybe slower than we'd like to. But these are really enormous organizations,

enormous balance sheets. And so once we get those structures in place, the idea is it can be scalable and grow at the speed of private sector deployment. Can you say a little bit more about those regulatory hurdles? Is it hurdles in terms of the ability to start an insurance company? Or are there still really major hurdles even once you're up and operating to actually get the projects out the door?

I'd say probably on the initial licensing. We've been able to get there fairly efficiently. But licensing for insurance is on a state-based. basis. So every state requires a new license, some of them conflicting, which is always fun, even down to what you can name a company that sells insurance in each jurisdiction. Yeah. But, you know, all things that we've been able to figure out, others have been able to figure out pretty easily. And again, the regulations are there for consumer protection that's there for good reasons in many cases. Yeah. Okay, that's helpful. So let's talk a little bit about moral

hazard, though, because this is something that comes up in the context of insurance, that sometimes if someone's insured, that might mean that they're willing to take bigger risks. So can you say a bit about that? Is that something that you're seeing in the context of what energetic insurance does? Or is this something that's a problem that's maybe a little bit more overblown? These are broader industry challenges. You mentioned one moral hazard. The other one is adverse selection, meaning the only people who seek coverage are the highest risk. And the other one, like you said, is that once insured, it allows the insured or the insured takes on riskier behavior than they might have otherwise. And these are big questions, I think, certainly outside the scope of energetic,

but broader questions for the industry to deal with in terms of, especially when we think about climate change and we think of people living in the woodland urban interface or we think about people living in coastal cities, you know, there's a big question to be had. Do we want insurance to be available to allow development in those reasons? Or as a society, do we want insurance to be a market signal telling people not to live there? And so I think that's an open question. There are insurers sending the signal, for example, that they're not going to insure coal mines or coal power plants anymore. And so that is one way to move a market.

I think there's an open question if you want insurer. to be the one sending that signal or not? Or on the other hand, do you want state or federal governments to force insurers to cover certain areas or the federal government steps into cover areas to allow those industries or those geographies to continue to flourish? I think that's a fascinating question, one that I'm not certainly in a position to answer, but it isn't necessarily about the insurance. It's about as a society, what signals do we want?

Where do we want to enable commerce and people to live? Yeah, but I'm curious to know, too, just getting specific, if you have any insights on how this might be playing out in the world of distributed energy, because I guess I could see that theoretically, you know, if somebody has, you know, an insured product and they're putting solar on their rooftop, they might, you know, suddenly decide they'll use all the energy they possibly want to use and that could put them, you know, in a different category with respect to credit risk. It's sort of, I mean, is that something that you see happening or is that not really how people tend to act once they have a solar rooftop? There's definitely a rebound effect. I'm aware of that across multiple industries, whether it's, you know, miles driven in a more efficient car or thermostat control in a more efficient house. So I think that can exist broadly and is kind of independent of financial mechanism. And not something that keeps me up at night. I try to focus more on how to get people those heat pumps and that installation and that. that solar, and then there are plenty of other behavioral monitoring or reinforcement mechanisms to avoid rebound. But it's definitely a thing. Yeah, okay. Helpful to know. So I think, you know, we've talked a lot about insurance as, you know, kind of an enabler of deployment. And I think that's what you and I are definitely most excited about. But we haven't touched very much yet on the topic of kind of insurance writ large within climate change, because I think what a lot of folks are

thinking about right now is the rising cost of climate disasters and all of the things that we're going to need to cover. And you started alluding to this, this question around, how do we send signals to people to kind of change their behavior in a way that supports climate adaptation? So I'm wondering if you can say a bit about what you're seeing in this, in this sort of market. I mean, I think some of this affects you really directly, right, because there are direct climate risks, even to climate technologies themselves. Like, a great example is we've been talking about solar and here in California, now we're getting a lot of days where, you know, things are pretty smoky and that's going to increase and that reduces your solar output. So how are you thinking about the climate risks? Maybe we'll start with that,

you know, that directly affects the technologies you're working to deploy. Yeah, I think the main approach that we take is for enabling resiliency. So, yes, there are going to be weather events and how can we make sure that there's more efficient use of power or on-site resources to help people ride through those difficult events. And you're absolutely right. There are some concerning feedback loops if you went solar to deal with an outage, and the outage is caused by fire. So those are complications for sure and things that need very specific local models.

But it really is around trying to enable resiliency wherever possible. And even in some of the Texas outages, in general, the renewable energy assets tended to perform better than the gas or thermal assets. So even if they're at utility scale, there's a potential for improvements in resiliency. I don't know if I want to wait entirely into that debate. But I think at the end of the day, when it comes to, there are going to be major storms,

and there's a real question, if insurers, this is above my pay grade, but if traditional insurers will continue to take on natural catastrophe risks in areas. I think we've definitely seen a backing away from California wildfire risk, potentially a backing away of Florida hurricane risk. These are areas where if insurance can't be procured on a cost-effective basis, it's going to really start to impact the ability for people to live and work there, to get mortgages. It's going to impact property rights and property values. So it's unclear to me how that will play out. Ultimately, insurance can't

sort of make that go away. It's not going to reduce risk. So what we look for... You can't solve everything with insurance, Jeff? Unfortunately not. Unfortunately not. Only risk transfer, not risk reduction. But looking for ways in which insurance can help us by being a signal for other improvements. An example that comes to mind is sort of the My Strong Home approach where it's encouraging the fortification of roofs and sending a price signal through the property insurance premium, or you can reduce your premium by taking better action. And so those are the things where I think there's a lot of room for improvement where it's a collaboration where risk reduction goes in conjunction with access to affordable insurance. Yeah, I think that makes a lot

a sense. I mean, it's clear that this is all so integrated, you know, resilience and actually doing the right thing by the climate and making this all work from a financial perspective. I think one question I have is, you know, we've talked a little bit about how this is really challenging work, right? This requires really deep understanding of financial systems in addition to engineering knowledge to kind of do this sort of risk assessment and transfer in ways that work well. So I guess my question is, you know, is how hard is this going to be for the the insurance industry writ large, because I think we're seeing a pretty fast clip of climate change compared to what we expected, even, say, 10 years ago. And, you know, there are the really

dramatic examples out there. So one of them, you know, in 1992, we had Hurricane Andrew that hit Florida. And it was $15.5 billion worth of damage, and 16 insurance companies went belly up as a result. So obviously, not every disaster is like that. But I think what we've seen is examples where it's just, it's hard to keep up. It's hard to make sure that your risk models and everything are actually reflecting reality. So what do you think about that? I mean, are we in a pretty tight spot, or do you think there are signs that the insurance industry is going to start accelerating its understanding of climate risk? I definitely think that insurance companies, the actuaries, and the data modelers are and have been sending those signals that the risks are growing.

and so it's a question of how we interpret those results. There will continue to be casualties. Insurers will go out of business. We saw that also in the force fires in California. That doesn't mean insurance doesn't work. It means you need to be careful about who you buy from. So one, in general, most states have a fund that protects insureds in the event that the insurer goes out of business.

So that's really important. That's part of the reason for the regulation is so that people are protected there. But there are, you know, this is a reason why you should be careful who you buy from because not everybody is going to be there. There are some major insurance companies

that have been around for hundreds of years because they take this seriously and they're very careful about risk selection. So I definitely think that the modeling is continuing to get better. And, but there are real risks and they're not going away. And so we need to really pay attention to how that's changing in the future. And there are a number of companies out there that are improving using satellite data,

using granular risk modeling, advanced mapping tools to better price these risks. But at the end of the day, there's still going to be hurricanes. We're not going to change that through insurance. Man, all right. Well, so I refuse to end this conversation on a dark note. So going back a little bit to this question again about insurance as kind of this hopeful way to help enable climate tech to scale. Let's talk about what do you think is the next best sort of technology space in which insurance can really be valuable in which there might be some real movement. It seems like you guys are working real hard on cracking the code on solar. But what's the next one out there that you would want to sink your teeth into? Yeah, we're really excited about energy efficiency. And it's something where it's not a new technology. And that's precisely why it's so exciting is because there are these proven technologies out there that are somehow not being deployed because there are some risks holding back that deployment.

And so what we do is we go in and we say, you know, talk to project developers, talk to banks. We say, what risks are holding you back? and what do you hate about insurance? And that's how we start the conversation of where to improve, where to bring in new financing models to help grow the market and accelerate deployment. This is really a great note to end on, because this brings us all the way back to graduate school, where, as I recall, we used to play a game called McKinsey Curve Bingo,

where we would all sit there. And as we had speakers that would come to school and would come to talk to us about what was happening in the energy world, you know, the McKinsey curve popped up again and again and again with so much efficiency, just there for the taking, economically available. And I think we've all been frustrated by our ability to tap that now, you know, sitting here decades later. So really glad to hear that that's the next frontier for you, Jeff. Really appreciate you coming out today.

Yeah, this has been a really fun conversation. And I know it's just the start. Hopefully this will engender many more conversations about insurance and how it can really help scale climate tech. Thanks, Laura. This was a blast. Really appreciate it. Jeff McCauley is the founder and president of energetic insurance. Catalyst is normally hosted by Shale Khan.

He'll be back after he returns from family leave. The show is a co-production of PostScript Media and Canary Media. Find me on LinkedIn and Canary and PostScript on Twitter. Tag us if you want to provide feedback on this episode or want to suggest future topics. You can find links for this episode's topics and guests in the show notes, or go to Canarymedia.com. Our producers are Daniel Waldorf and Stephen Lacey. Music and Mixing by Sean Marquand.

I'm Laura Pearpoint, and this is Catalyst.