Managing risk and supporting growth in solar energy
The solar industry in the United States has gone from strength to strength in recent years with growth expected to continue following an increase in installations of 50% in 2023 and the introduction of the Inflation Reduction Act (IRA) in 2022.
This growth was also reflected in a survey of the energy sector recently commissioned by AXIS, that found solar technology is the most common area of investment across the renewables sector. For the renewable energy insurance sector, this expansion also provides the opportunity to develop elevated, specialist solutions that will support the ongoing growth of a resilient and sustainable solar industry.
However, this expansion also comes with additional challenges from a risk perspective that are starting to come to the fore. One such issue is the impact that the expansion of projects in both size and number is having on the availability of insurance coverage. As the solar industry has expanded, naturally, so too have the size and frequency of claims.
With insurance capacity coming under pressure from heightened demand and increasing losses, insurers are changing the way they view the level of risk at a solar site. This, in turn, can change how project owners manage their projects, both financially and physically. Understanding the factors that are increasing the risk of claims and the pressure on available insurance coverage are key for helping the solar industry and insurance partners to work constructively together to mitigate and manage potential costly losses down the line.
Severe weather
A key risk affecting solar projects is, ironically, the change in climate that renewable energy technologies are built to try and reduce. Some of the best locations for developing solar energy generation, such as California, Texas and Florida, are also where insurers are seeing some of the most severe weather and the effects of an uptick in secondary perils, namely wildfire, flood and severe convective storms (lightning and hail).
Consistently large weather-related losses in recent years, including the largest to date – a hail strike on a solar project in Texas that led to an insurance claim in the region of $70-80 million – have meant that insurers are reassessing and rethinking the way they insure projects.
Location, location, location
There are three main ways that insurers manage risk in areas that are prone to severe weather: by managing their aggregation; charging what is known as a “natural catastrophe premium;” and setting terms and conditions that mean the project owner retains more risk.
In the first case an insurer will decide how many projects they are comfortable insuring in that specific area, making sure that the total potential loss is reasonable. In the second instance, a natural catastrophe premium is charged based on the modeled catastrophe risk in the region. In the third instance, insurers may ask project owners to retain more of the risk themselves, so, for example, the project owner may be liable for the first $1million of any claim.
All of these factors will affect the project owner’s ability to operate in this area and increase the costs for project owners, which may affect their margins today and in the longer term.
Supply chain
In addition to the issues caused by severe weather, insurers are dealing with more general issues that are impacting many industries. As the number of renewable energy projects grows the availability of the ancillary products and technologies needed to sustain them can also come under pressure. The result can cause downtime and loss of income when projects are unable to produce energy for the grid, leading to large business interruption claims (BI). As an example, if a transformer on a solar project is damaged and stops working, the BI insurance can compensate the project owner for the revenue they are missing during that period. Ideally, it would be for a short amount of time before a replacement is sourced and the project is reconnected, however in the case of transformers there can be extremely long wait times of up to two to three years in some cases, which, again, insurers need to consider when assessing the magnitude of the risk.
Rapid growth has also exposed the lack of experience in the solar industry. As the industry grows, it attracts more companies keen to build and maintain projects, but it takes time for companies to gain the experience necessary. In some instances, tight deadlines and budgets will mean that contractors themselves subcontract, adding to the lack of experience in the field and often increasing the number of claims that are due to contractor error.
Developing solutions
So, what can be done to elevate and secure the availability of insurance as the solar industry grows? There are several ways that project owners can help insurers to understand and evaluate the potential risks for a project.
In areas that are susceptible to hail, projects must be engineered with systems that will avoid as much damage as possible. Additionally, those projects should be well maintained, so that the necessary equipment works when there is a hailstorm.
Project owners need to understand the lead times for replacements at the genesis of a project. If an essential piece of equipment will take months or, in some cases, years to arrive on site, it is important that there are spares on site.
EPCs should be carefully selected based on reputation and experience and, if they choose to appoint subcontractors, the project owners should understand the capabilities of the subcontractor.
Finally, the key to building sustainable growth of the solar industry is reducing the barriers between different stakeholders through better communication across all elements of a project and engaging insurance partners early and openly. As weather events become more severe, risk mitigation becomes ever more essential. By working together, stakeholders can deliver the projects necessary to combat climate change.