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Insurance Incentives & Green Energy Upgrades

By Michael Giusti

As homeowners and drivers venture into our eco-conscious world, they are finding an economy chock full of incentives and insurance implications that come along with many environmentally conscious investments.

Congress doubled down on incentivizing the public to make green investments, incorporating tax credits for everything from home renovations to electric vehicle purchases into its Inflation Reduction Act last year.

So, as more people begin to examine and consider green investments, this Green Energy and Insurance Guide aims to break down some of the basic terms, policies, and concepts people will face as they venture into the world of eco-friendly initiatives.

How Green Energy & Insurance Relates

Any conversation about ecofriendly initiatives should probably start with the why — and that is climate change. Human-caused climate change has caused global temperatures to rise over the past decades, and that has shifted weather patterns in ways that have had implications for homeowners, and insurers alike.

With higher temperatures, there is more energy in the atmosphere, which leads to more severe storms on average. Those storms lead to more costly payouts for insurers.

The result can be seen in visible disasters, such as major hurricanes and floods, but also in chronic disasters, such as the megadrought in the western United States, where climate change has led to more wildfires and longer wildfire seasons.

For homeowners, windstorm coverage has become increasingly difficult to find in hurricane prone states, like Florida and Louisiana, pushing more and more homeowners onto their state insurers of last resort.

A major driver of that dearth of policies is coming from the reinsurance market — the large companies that backstop insurers and offer them catastrophic coverage in case the insurance company has to cover a major catastrophe. Many of the reinsurers have taken major losses from a combination of natural disasters, and even from war-driven losses, leading to much higher reinsurance rates, making nearly every policy more expensive and harder to get.

So, within the backdrop of an insurance market driven toward crisis by climate stress, individual efforts to mitigate carbon emissions make even more sense. 

Defining Green Energy

When it comes to green energy, from a consumer’s perspective, there are a few basic categories. First, there is the electricity — the actual electrons created from renewable sources. For homeowners that is typically solar, but there are some small-scale wind turbines available for home applications, and even a few geothermal options that are emerging.

The next category is storage. The two types of storage are chemical storage and molecular storage. Chemical storage is batteries, and by and large, that is lithium-ion batteries. These include Tesla Power Walls, but there are other manufacturers, including Solar Edge and Generac that also offer whole-house battery storage.

Green molecular storage is typically hydrogen. There aren’t many hydrogen generators and fuel cells commercially available, but with the tax incentives built into the Inflation Reduction Act, they may be in the works.

The final category is efficiency. This can be through home upgrades, such as heat pumps, or Energy Star-rated appliances, or through replacement windows, new insulation, or weatherization.

Which Green Energy Upgrades Affect Insurance Costs?

The Inflation Reduction Act expanded the tax incentives for many of these energy efficient upgrades, making many of them much more approachable for typical homeowners.

Installing a solar or wind electrical generation system will earn the homeowner a 30% federal investment tax credit on their income tax returns. There are also some state and local incentives, too, so check with local installers to see what is available locally. For people who don’t earn enough to qualify for the tax credits — it’s non-refundable — some companies will lease the panels, requiring no up-front cost to the homeowner.  

New in 2023, the Inflation Reduction Act also expanded the 30% Investment Tax Credit to energy storage options. Now, installing a whole house battery backup, or a hydrogen fuel cell backup, will earn the homeowner a credit equal to 30% off the cost of the installation.

The main benefit of a battery backup system is that they allow for the solar or wind system to continue to operate during a power outage. Typically, solar systems require a disconnect that shuts the system down during an outage so they don’t bleed power back into the grid, potentially endangering line workers who might be trying to restore power. But with a battery system, the power can instead be diverted to the battery and keep the house lit up during that power outage.

The batteries, which can be mounted on an exterior wall of the home, are still on the costly side but are about the same cost as a small natural gas whole house generator after the tax credit.

Weatherization projects, which can include insulation, energy efficient windows, upgraded doors, or electrical system upgrades, also all qualify for the 30% tax credit, but they all come with an annual cap.

One of the biggest upgrades being pushed is for heat pumps, which are essentially air conditioners which can be run in reverse to create heat as well. They run on electricity, so they don’t burn any fossil fuels in the home the way an oil or natural gas furnace does. This year the Inflation Reduction Act increased the tax credit for heat pumps to a full 30% of the cost of the replacement system, up to $2,000 per year.

Installing an electric vehicle charger can also earn the 30% tax credit, up to $1,000 per year.

The Inflation Reduction Act even included a provision for homeowners to get up to $150 back toward the cost of a home energy audit to see where the most efficient cost savings can be found.

All of these incentives were specifically targeted toward retrofitting older homes. New construction is excluded.

For people building new homes, choosing to go all in and hiring a contractor who is certified by the Green Building Council’s Leadership in Energy and Environmental Design can result in a home that is certifiably more efficient. And some insurance companies offer modest discounts for LEED certified homes — around 5%.

Home Insurance & Green Energy Upgrades

As a rule, insuring your green upgrade is simple, presuming it is permanently affixed to your home. That is because typical homeowner’s policies automatically cover any element of a home that is permanently attached, unless it is excluded by the policy’s language.

But that caveat is important.

That is because some policies do specifically write out solar panels. With solar panels still representing a relatively new risk, there isn’t enough robust data for some insurers’ taste, so they are opting out rather than risking it. Their fear appears to be that the glass panels may present a hail risk, or the raised lips may present a windstorm risk.

But unless they are excluded specifically, and presuming the panels are permanently affixed, they should be covered.

That said, adding a solar panel system does add value to a home — sometimes as much as $20,000. After installing that system, it is a good idea to talk to an agent to make sure that the added value is accounted for in the premium. If the home were to burn down, for example, the homeowner would want to make sure there is enough coverage to make sure the new upgrades would also be covered.

Where the upgrades were installed also matters.

If the solar panels, or the wind turbine for that matter, were installed somewhere other than directly attached to the home — say it is free standing away from the home — that would not automatically be included as part of the home’s structure. If the homeowner wanted that covered, they would need to work with their agent to get additional coverage.

And if the panels were installed on a freestanding structure, such as a shed or detached garage, they would be limited by that structure’s lower policy limit — typically a fraction of the main structure’s value.

So, the bottom line is that it is always a good idea to discuss any green addition with an agent to make sure that it is covered and there is enough coverage to replace it if something were to go wrong.

Another interesting thing to note about homeowner’s insurance is that some policies allow riders to let the homeowner rebuild the structure with energy efficient materials and practices after a covered loss. Some business insurance policies offer that upgrade as well.

So, for an added premium, not only could the home be rebuilt after a loss, but it could also be rebuilt greener.

Electric Vehicles & Auto Insurance

The home isn’t the only place there are incentives and insurance implications for going green. The driver’s seat is another place to think about the climate.

The Inflation Reduction act extended the tax credit for buying electric vehicles — but it also complicated it by putting new stipulations on where the components need to be built and sourced.

The upside of deciding to go electric is that driving an EV comes with much lower operating costs. The per-mile cost of electricity is a fraction of the per-mile cost of gasoline, especially when the vehicle is primarily charged at home or at work. And because an EV has a tiny fraction of the moving parts compared with an internal combustion engine, the maintenance costs are typically much lower — there are no oil changes, for example.

With the new stipulations on the tax credits, it isn’t automatic to see which new vehicles qualify for the $7,500.

New in 2023, people who buy some used EVs or plug in hybrids from a dealer also now qualify for tax credits of up to $4,000.

For people who want an EV that doesn’t qualify for one of the tax credits, one of the loopholes advocates are pointing to is that leasing the EV can often get the same value that they could have gotten had they financed it after the tax credit because the dealers can take the credit and apply it toward the lease.

One potential drawback when it comes to EVs is that insurance can be a bit more costly. For one, the sticker price for EVs is still a bit higher than comparable gasoline versions, so higher replacement costs mean higher insurance premiums. Also, repairs are also a bit more costly because there still aren’t as many certified EV mechanics as there are gasoline mechanics. And aftermarket parts aren’t typically available, so the only option are from the original equipment manufacturers — a more expensive option.

Plus, if the battery is damaged in a crash, an otherwise minor accident can lead to the vehicle being totaled because the cost to replace the battery can often exceed the value of the rest of the vehicle.

Are Green Upgrades Worth It?

As people venture out into the new green world, they are going to find incentives and insurance implications all around them. Whether that is in their homeowner’s policy, their automotive policy, or on their income tax form, the details are going to matter, but the opportunities also abound.

Getting it right is worth it in the end. A greener planet is better for everybody. The details are just going to take a little while to figure out.

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