California is driving an ambitious transition to electric vehicles (EVs). In August 2022, the state announced it would ban the sale of new gasoline cars beginning 2035. But California’s plan also presents new challenges for the energy market and risks that insurers must consider.
The “Advanced Clean Cars II” act accelerates the phase-out of polluting vehicles in California, and other states may follow suit. New York state announced last month it would adopt similar rules on EVs to mitigate the impacts of climate change.
Daniel Drennen (pictured), VP and environmental practice leader at Amwins, noted that California’s EV announcement coincided ironically with rolling blackouts in the state. “There are questions about what the energy grid can sustain. You’ve got to have the energy infrastructure to support all these electric charging stations,” he said.
California’s governor Gavin Newsom has dismissed concerns that EVs will cause additional strain on the state’s grid. EV charging only accounts for about 0.4% of the overall energy load during peak hours, according to data from the California Energy Commission. And by 2035, electric cars are estimated to account for only 4% of the demand.
California has the largest percentage of EVs of any state, with almost 16% of cars sold there in the first quarter of the year being fully electric, according to EV Adoption.
For Drennen, the market must turn to clean energy generation to meet the demands of California’s EV deployment means. He told Insurance Business: “There are also some questions about sustainability. If you have a lot of electric charging stations, but it's all being fuelled by coal power plants, is it really netting much of a difference?”
The New York Times reported that California added new power plants and restarted some shuttered fossil fuel generators over the last few years to cope with the rising energy demand. This past summer, California lawmakers also approved hundreds of millions of dollars to be used to buy emergency power from natural gas-fired plants to prevent blackouts.
Drennen also pointed out the risks that come with California’s EV transition. Building more charging stations, for one, could potentially ramp up California’s already significant wildfire risk. “There’s a huge risk if these source systems aren’t built to the right standards. Insurers could face massive claims from battery energy systems catching fire,” said Drennen. “You’ve got to have the insurance to support the EV transition.”
He added: “There are other issues from an environmental standpoint. Batteries typically last eight to 10 years, and there’s no standard for recycling those batteries yet. We also need to think about having the systems in place to properly handle the waste that's created from this.”
Broader push for green policies
The California EV plan as part of wider push for green policies in the US. The Biden administration signed a landmark climate act in August that lays out $369 billion in federal rebates and incentives to supercharge clean energy initiatives. The law aims to reduce 40% of greenhouse gas levels by 2030.
“There’s obviously been a big boost from the government to push these green policies, which creates lots of opportunities, whether it's in supporting solar, wind, battery, or energy storage systems,” said Drennen. “But with any emerging technology, you're going to have unmodeled losses.”
He cited $60 billion in property losses from hail on large solar farms, as one example. But he also said the insurance industry’s focus on renewables is warranted. “Ultimately, there’s going to be a change,” he said. “A lot of insurers have put in ESG policies to work more closely and invest in emerging technologies. There’s been probably 10 or more property and casualty insurers that have restricted coverage on coal- and oil-related assets.”
Drennen expects a continued push away from fossil fuel usage and a surge in opportunity for the energy insurance market. But it will take time, he cautioned. “While it's great to go to a completely green footprint, we're not there yet and there’s still a long way to go,” he said.