Disasters associated with extreme weather events (e.g. storms and floods) are becoming more frequent and more intense due to climate change. As a result, the insurance market has experienced a dramatic increase in both cost and demand. With payouts for natural disasters also becoming more frequent and larger, insurance companies have been raising their premiums for policies that cover these kinds of risks. A recent study released by international law firm Norton Rose Fulbright finds that premiums have been soaring for property and casualty insurance that safeguards renewable generation assets. In particular, premiums of insurance policies for solar projects have risen by as much as 400% over the past 18 months.
Undoubtedly, extreme weather events have not only had serious environmental impacts but also inflicted tremendous losses of lives and property worldwide. Like many other assets, photovoltaic systems are at risk of damages caused by extreme weather events. After all, they are left exposed in an open area and subject to various conditions of the outdoor environment. In 2019, a hailstorm wrecked around 400,000 photovoltaic modules at a 175-megawatt solar project in Texas. The loss was severe enough to force the sale of the project for US$70 million. Also, three other solar projects in California suffered damages during this year’s wildfire season. One of them is expected to incur an insured loss of US$25-28 million.
Members of senior management at insurance companies have pointed out that underwriters including banks and investment firms have begun to tighten up restrictions, exclusions, and limits when negotiating insurance contracts with owners of renewable energy projects. Renewable generation assets are just too vulnerable to hailstorms, tornadoes, wildfires, and other recurrent natural disasters in the US.
Fraser McLachlan, CEO of GCube Insurance, told the Financial Times that he cannot think of any factors other than climate change when it comes to the recent spike in the cost of solar project insurance. Even though photovoltaic systems are designed to operate outside in the elements, the frequency and scale of natural disasters are growing due to climate change. The monthly hikes in premiums for solar project insurance have come to 20-30% on average over the past year. With the losses getting bigger, insurance companies are compelled to raise the deductible and shrink the coverage that is offered in the contract.
Recently, Fatih Birol, executive director of the International Energy Agency, said that solar energy will soon become “the new king” of the electricity market. Studies in many countries have also shown that building new photovoltaic power plants are cheaper than building coal-fired or gas-fired power plants. However, the issues related to insurance (i.e., the rising cost and the reduction in coverage) have emerged as one of the many challenges confronting developers of solar projects. Michael Kolodner, practical leader of the US power and renewables section at insurance broker Marsh JLT Specialty, said that the extreme weather events have introduced a significant variable in cost calculation. In many cases, renewable energy projects have failed to achieve their originally projected returns after being hit by a natural disaster. This, in turn, makes designing insurance packages very tricky in the future.
In Kolodner’s view, prices will keep going up in the insurance market, but the increase in premiums will be especially sharp for solar projects.
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