Hailstorm Risks Need Not Put Solar Energy Projects in Peril
The solar energy market is growing at a brisk pace, with solar photovoltaic (PV) installations in the US increasing by 40% in the first quarter of 2020 compared to the same period last year. And despite the ongoing COVID-19 pandemic, growth projections through 2025 are down only 3% from the current record increases. But as the PV footprint continues to grow, natural catastrophe events are increasing in frequency and severity, threatening the financial stability and security of both existing and future projects.
Greater Underwriting Diligence and Discipline
For those in the solar energy industry, earthquakes, floods, and windstorms are no longer the primary natural hazards of concern. According to the National Oceanic and Atmospheric Administration, there were more than 5,000 hailstorms in the US in 2019 and more than 3,000 hailstorms during the first half of 2020. The damage from these storms can be extensive: A 2019 hailstorm in Texas reportedly generated more than $80 million in paid claims for a single project.
Specialty underwriters, already struggling to profitably insure renewable energy projects, are recalibrating their models and adopting strong measures to mitigate exposures, complicating the solar energy industry’s ability to efficiently finance future projects. Enhanced underwriting discipline means existing projects may find it challenging to remain compliant with historical commitments to maintain coverages required to satisfy investors.
Risk Mitigation Considerations
To improve their ability to secure insurance and financing for ongoing and future projects, PV developers need to be proactive. Specifically, risk professionals should consider:
- Location, location, location: Where possible, consider sites that are less exposed to hailstorms, while understanding each location’s relative exposures. Modeling capabilities leverage high-quality data to assess the frequency and severity of hailstorms and generate credible loss scenarios. Even for unavoidably exposed locations, sharing data-informed decisions with key stakeholders will improve access to financing and risk capital.
- Materials and systems really do matter: Certain designs are more susceptible to microcracking — cell damage invisible to the naked eye. This can leave installations vulnerable to hailstorm damage while also driving up insurance and claims costs. Considering designs that are more resistant to damage or using improved technology, including tracking systems, to mitigate risks may appear more costly, but extra expenses should be assessed relative to the risk of loss over the project lifecycle and the cost of maintaining efficient access to capital.
- Challenging perceptions of what’s possible: Existing and future projects can optimize their insurance programs and drive levalized cost of energy (LCOE) reductions by modeling exposures, introducing new risk capital, increasing program syndication, and effectively engaging with stakeholders during both development and operation. In some cases, parametric and other specialty insurance coverages, together with longer-term use of new and existing mutual carriers, may also be considered.
As the energy transition continues to accelerate, demand for PV projects is expected to grow. Leaders in the space will be those who continuously elevate the industry’s risk management maturity, mitigating their risks and securing the most efficient sources of capital.