Page 88 - North American Clean Energy March/April 2020 Issue
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year in terms of overall growth for renewable energy. In April, for the first time ever, renewables beat out coal in the US energy supply, making up 23 percent of the nation’s power generation. Additionally, the wind sector saw its third best year for installation, with 9.14 GW constructed, and another 44.15 GW
in the pipeline for 2020. Installation of solar panels passed two million in mid-2019, with the three- million milestone set to be passed in 2021.
2019 also was a very challenging year for the industry, as we felt the effects of a significantly elevated risk profile. As the renewable energy industry enters a pivotal 2020, it must adapt to this new normal, and a reset in the insurance market is needed to cover these risks if the industry is to see another good year.
1. A new normal for extreme weather
The US has seen an increase in extreme weather events over the past few years as a result of climate change. In 2019 alone, according to the National Oceanic and Atmospheric Association, flooding, storms, cyclones, and wildfires caused fourteen separate billion-dollar disasters.
Depending on the region, renewables projects across the country were hit by heavier rainfall, larger hail, bigger and more frequent tornados, and a polar vortex. Hurricanes in particular have become larger, slower, and wetter, posing a greater threat to renewables projects in their path. It’s estimated that losses as a result of extreme weather accounted for at least 50 percent of all North American renewable energy claims in 2019.
The locations for these weather events have also changed. As unpredictable weather patterns continue to spill out of risk zones, projects that were previously considered benign (in terms of CAT) are now at risk.
Losses resulting from natural catastrophe are on the rise. Ice-coated blades have halted operation, hailstorms have destroyed hundreds of thousands of PV panels in solar farms, and floods have engulfed projects – all of which has put greater pressure on the insurance industry to not only cover current claims, but to prepare for an increase in the number and size of claims for the future.
Over the past year, a number of insurance firms have stopped underwriting renewables, as the frequency and size of claims was higher than their premiums could cover. With extreme weather becoming a more significant threat to renewable energy projects, it’s clear that a reset of prices is
by Brian Tyluki
needed. Proactive insurance providers will take the lead in engaging with insureds at least six months from renewal, in order to discuss the reset of premiums to a sustainable level and provide transparency into the process.
2. Low resource will impact power production
Weather does not have to be extreme to cause losses in revenue. If wind resource is low or the sun is obscured by clouds, no power will be generated. The industry has started to insure itself with weather risk transfer (WRT), which passes on the risk of short-term resource fluctuations to a third-party provider.
With more sophisticated tools for resource monitoring and analysis, the industry must re-assess the resources of previously-built sites and ensure the best case for new sites.
3. Cyberattacks will grow in prominence
While cybercrime is widely recognized as the biggest risk to business across the globe, last year saw the first report of a hack on a renewable energy developer.
As renewables start to make up a bigger share of power generation, they will be increasingly targeted for DoS or ransomware.
It is more important than ever for the industry to manage cyber risk. While there are many steps that can be taken to reduce risk, if hackers really want to find a way through your cybersecurity measures, they will. Many insurance providers cover physical damage as a result of cybercrime, but a truly comprehensive cyber risk product will also cover the more common ‘non- damage’ losses from business interruption and ransom.
4. More scrutiny on insurance terms and conditions
The changing risk profile of renewable energy development and construction in North America will lead not only to a reset on premium pricing, but also increased scrutiny on what is covered under the policy.
One area of increased scrutiny will be “loss creep”. Developers and insurers must work together to prevent losses from “creeping”, or gradually increasing, as the full effect of an initial insured event becomes clear. If loss creep becomes too significant, this will have knock-on effects on insurers and the market.
In the case of project construction, insurers need a clear view of progress in order to assess the degree of delay-to-start-up (DSU), and quantify the loss that
must be paid out. Once the insurer has triggered the indemnity period following a loss, the insured business will not be able
to extend the DSU, so ensuring that a fair claim is paid out requires developers to keep track of progress and give a clear estimate for project delays.
Another key change for insurance will be a hardening of terms and conditions. Previously, overly generous terms and conditions have allowed developers to add contractors to their existing policies. This has led to many contractors bidding
low in order to win contracts, and claiming back as much as possible from insurance with spurious claims such as damage to temporary roads between turbines.
Having other parties on the insurance policy can also prevent subrogation in the event that one of them is responsible for the damage. For example, if a contractor at site causes damage to a developer’s property, the insurer will pay out the claim for the developer, but may be unable to sue the contractor for property damage if their place on the policy is not carefully defined. Without clarity in the terms and conditions, these losses could ultimately force more insurers out of the market.
Resetting benchmarks
2020 is the year when the US market must adapt to a 'new normal' in renewable energy risk and reset its benchmarks for sustainable insurance and risk management. With the greater prevalence and cost of losses from the risks outlined above, measures have been taken in an attempt to mitigate and cover these emerging threats, whether it's through increasing insurance rates and deductibles or restricting/sub-limiting CAT coverage, but more corrective action needs to be taken across the board.
If the renewables insurance industry doesn't adapt quickly for these changes, capacity to continue paying for these claims will eventually run out – and if there is no insurance to back projects, the future of renewable energy hangs in the balance.
Brian Tyluki is Senior Vice President for GCube Insurance Services, which provides renewable energy insurance for over 100GW of projects worldwide.
GCube Insurance Services
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