Modeling energy efficiency insurances and energy performance contracts for a quantitative comparison of risk mitigation potential

Highlights: • Quantitative comparison of risk mitigation potential of risk transfer contracts • Introduction of energy bill savings forecast model based on real-world data • Risk transfer contracts positively affect private energy efficiency investments • Energy Savings Guarantee is superior to insurances based on fair premiums. • Energy Efficiency Insurances could be superior when transaction costs are reduced. -- Abstract: Financial risk mitigation via Energy Performance Contracting or Energy Efficiency Insurances may overcome individual barriers for energy efficiency investments. However, while the financial industry, and especially insurance companies, may have compelling reasons to get involved in energy efficiency investments, the research on and real-world applications of risk transfer contracts for private decision-makers are scarce. Thus, this study quantitatively compares the risk mitigation potential of risk transfer contracts based on a comprehensive energy bill savings forecast model comprising stochastic processes for weather, commodity prices, and technological energy efficiency performance. The model is fitted with a unique dataset for German residential buildings. Our findings indicate that risk transfer contracts positively affect individual decision-makers' willingness to invest in energy efficiency. Generally, we find Energy Performance Contracts to be superior in most scenarios when transaction costs are not considered. However, insurance companies may benefit from diversification effects and by ceding risks to global capital markets and reinsurance companies.