Insurance costs for clean energy buyers are rising: Here’s what buyers need to know (Part II)

ICYMI: Read Part 1 in the series here

In recent years, clean energy developers have faced new challenges in adequately insuring project developments. Property and casualty insurance costs are rising due to an uptick in occurrences of severe natural disasters. Meanwhile, associated upstream pressures from reinsurance carriers are driving cost increases. 

Trio helps its clients understand these trends and safeguard against uncertainties by: 

•  Identifying weather-associated risks at a particular project location, which may impact accessibility to adequate insurance coverage."
• Ensuring that PPAs include a requirement of sufficient property and casualty insurance and clear guidelines for the handling of casualty events
• Evaluating preventative measures to mitigate extreme weather-related impacts

Extreme weather: The driving force behind asset losses 

A key factor in clean energy project development is securing adequate property and casualty insurance coverage based on a project’s location. The types of coverage offered largely depend on a project’s proximity to areas prone to severe convective storms (SCS). 

SCS are weather systems characterized by strong upward air currents (convection) that produce extreme weather conditions. These storms typically form when warm, moist air rises, rapidly cools, and condenses into clouds. They are associated with weather phenomena such as large hail exceeding one inch, heavy rainfall, flash flooding, lightning, winds over 58 mph, and tornadoes. 

SCS account for ~70% of global insurance losses in recent years, and occurrence of these storms has increased due to climate change. According to JD Supra, between January 1, 2012, and January 1, 2024, large hail originating from SCS occurred 197 days per year on average in Texas. Clean energy buyers in Texas’s ERCOT market should be particularly familiar with this trend. As reported by Moody’s, of 18 major SCS events in the U.S. in 2023, losses per event averaged $1 billion - nearly 40% higher than average losses in 2017 through 2022. Meanwhile, insurers are growing increasingly concerned about disruptive weather events. 

Solar and wind energy projects can be significantly impacted by SCS due to their large footprints, increasing the likelihood of impact. Strong winds can damage wind turbines, exceeding their operational limits and increasing the likelihood of mechanical stress and blade damage. Wind turbines are also prone to lightning strikes, which can damage electrical components and control systems, or even cause fires. Solar panels and associated generation equipment are equally susceptible to lightning strikes, which can lead to power outages and costly repairs. Large hailstones can damage solar panels, cracking or shattering the glass, reducing their efficiency or even making them non-operational. Additionally, debris and flying objects from these storms can damage solar panels and wind turbines, leading to downtime and steep repair costs. 

Continuing industry trends

In recent years, there has been a dramatic shift in the way property and casualty insurance plans are drafted for clean energy projects. As the frequency and intensity of SCS and other weather-related events increase, insurers are adapting policies to better address the unique vulnerabilities of renewable energy assets. These adaptations include but are not limited to:

• Higher premiums and deductibles in storm-prone areas
• Loss mitigation requirements
• Component-specific coverage riders 

A prudent effort towards extreme weather mitigation measures

Buyers may want to evaluate whether developers are incorporating mitigation measures into their project design to prevent excessive storm damage. For solar facilities, excessive hail damage can cause issues such as wet leakage, which reduces overall power output. According to the National Renewable Energy Lab (NREL), the likelihood of most solar panels sustaining hail damage is 5% or less. However, projects located in storm-prone areas, particularly where SCS occur at higher-than-average rates, may benefit from certain project modifications. 

As reported by the American Ceramic Society, thicker solar panels with a front glass thickness of 4 mm will reduce or nullify hail damage. Glass that is thinner than 3.2 mm is typically non-tempered and therefore not as strong in a hail event. Buyers may want to ask sellers if their preferred solar panel manufacturers have conducted hail testing above minimum International Electrotechnical Commission standards. 

Additional concerns arise when strong winds are associated with SCS. While solar panels are particularly resilient to high winds, winds over 100 mph pose a threat to projects. Strong straight-line winds may crack glass on panels, remove panels from their racking, and loosen installation brackets. Buyers should be familiar with weather-related design requirements needed during project development to mitigate the risk of damage. 

Project developers utilize pressure ratings to analyze downward pressure (snow load) as well as uplift (wind) when designing a project. Locational-specific data is used in this process, and this data is informed by historical weather information and topographic features. Most commercial solar panels are rated to withstand winds of up to 140 mph, or the strength associated with an EF-3 tornado. However, in tornado-prone areas, higher wind speeds are of concern. 

In Oklahoma, a Southwest Power Pool (SPP) state with attractive solar and wind resources, the highest winds ever recorded reached 321 mph in an F5 tornado in 1999, as reported by the Des Moines Register. While PV equipment may not withstand such high winds, ultimately developers will need to select appropriate panel support equipment for potential storms with winds over 140 mph. This includes rail attachments, mounting, and racking choices to withstand stronger winds. In any case, any system in use should undergo effective third-party testing, including a wind tunnel test to ensure durability. 

Weather-related coverage endorsements and further mitigation efforts 

Wind and solar assets may be subject to weather-related coverage riders. An insurance rider (endorsement) is an amendment that adds or changes the terms of an insurance policy to add additional coverage. In some states, weather-specific riders are necessary to assure adequate coverage. For example, in Florida, some solar developers may procure a hurricane rider to cover the costs of restoration in such a weather event. In states prone to SCS, such as those in the middle of the country, developers may use a named-peril approach to specify weather-related risks.  

These weather-specific riders help to mitigate weather events more likely to occur at a particular location and limit coverage for lesser assumed risks associated with higher-cost all-risk-coverage-based policies. Because of the significant costs associated with these riders, some developers also have “self-insured” projects to stay within their operations budgets. Others mitigate exposure by developing projects across geographic locations, therefore spreading the risk. Power purchase agreements (PPAs) are typically connected to a single project, which means buyers are exposed to the developer’s insurance strategy for that project. 

Mitigating cost impacts in storm-prone areas 

Solar and wind energy projects face increased threats from severe weather, including SCS. Storms causing large diameter hail, strong winds, and frequent lightning pose threats that may disable or severely reduce production from such assets. These weather events -increasing in frequency due to climate change - pose a threat to the security of generation assets, particularly in areas prone to such storms. Insurance providers are responding through increased premiums and higher deductibles. These costs are passed onto project developers who, in turn, pass them on to buyers as increased PPA prices.  

Clean energy buyers should be familiar with the current trend and be aware that projects based in specific geographic locations may be impacted by higher costs of insurance. Likewise, clean energy buyers should familiarize themselves with the types of planning and mitigation strategies, including technical applications used by sellers and the types of insurance riders available to decrease risk associated with major weather events. Trio assists clients in conducting due diligence, understanding and weighing the risks, and establishing contract terms that protect buyers.  

Evan Dell’Olio is a Senior Clean Energy Originator with Trio. If you would like to connect with Evan on this topic, please feel free to send him an email here.