Policies for Building the Technology Performance Insurance Market

Yuqi Zhu and Aaron Bergman
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Yuqi Zhu: Resources for the Future

No 25-03, RFF Reports from Resources for the Future

Abstract: Decarbonizing the global economy will require substantial investment in new industrial-scale climate technologies. A key step in this process is moving from prototype to full-scale demonstration and deployment. Through both government and private-sector investment, these technologies attempt to cross this “valley of death,” often involving considerable expense and risk associated with building at much larger scale. A particular challenge for first-of-a-kind (FOAK) to nth-of-a-kind (NOAK) projects is technological performance risk, where a lack of existing history leads to uncertainty about whether the finished facility will operate as intended. Without a way to guarantee performance, these projects can struggle to find adequate contracted offtake and financing.One compelling solution lies with insurance, which can shift technological risk from companies or project owners to an insurer at a cost to the insured. Often, the perceived risk of an emerging technology is much higher than the actual risk, leading to a high cost of capital. By accurately assessing and then assuming this risk, insurers can play a key role in helping project developers obtain lower-cost financing. While private insurance providers have historically offered this type of technology performance insurance (TPI), it is often only sparsely available and at a significant premium. At the same time, existing government solutions, primarily in the form of loan guarantees, may be inadequate due to challenges with the application process and less willingness to take on technology risk for projects earlier in the commercialization process. These loan guarantees also do not address issues with securing offtake contracts.Historically, markets for commercial-scale clean technologies took decades to coalesce, but achieving 2050 climate goals necessitates a much faster pace of deployment. With time of the essence, governments may need to step in to help build the performance insurance market. There are several ways that the government might play a role in increasing the availability of technology performance insurance. First is through an insurance backstop, which incentivizes private insurers to provide insurance up to a certain level of losses, at which point the government steps in. The second is through a federally operated insurance program, similar to the one offered through the Department of Energy’s (DOE) Loan Guarantee Programs Office (LPO), which would draw on the full technical expertise of the government and offer an insurance policy to project developers. Finally, we also consider opportunities for DOE to facilitate greater collaboration between project developers, insurers, and policymakers.In this report, we provide background on technology performance risk, explore the pros and cons of each of these policy options, and discuss potential design and implementation questions.

Date: 2025-02-20
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
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