Once seen as novel or risky, solar energy is now a secure, standardized investment class with reliable equipment and long-term utility power purchase agreements (PPAs) in place lasting 20 years or more. Gone are the days when PV investment was treated as high risk/high reward and these projects now commonly attract the interest of large banks, insurance companies and pension funds. The pool of lenders and investors in the North American solar market has grown significantly in the past five years.
In this industry climate, it has never been more important for solar developers and operators to ensure their assets are adequately covered against financial and operational risk. The lender is in the driver’s seat and the lender does not want risk. Thus, no matter how attractive a deal may be, insurance is a must to ensure the bankability of a project and guarantee that all-important project finance.
Neither bank nor equity investor wants to take on more risk than is absolutely necessary. From the insurer’s perspective, this is commonly exhibited in requests for waivers of subrogation or non-vitiation wording, or in specific demands related to the unique situation of a project, such as the limits of windstorm coverage a project along the Gulf Coast might need to buy. Likewise, the growing role of lenders’ consultants has exemplified that insurance is more than a mere checkbox for investors and driven demand for more comprehensive coverage.
This elevated demand, in combination with the expansion of the market, has, in turn, fuelled the evolution of the solar insurance products designed to safeguard the sector.
As the market has matured, there’s been a growing focus on covering values that go beyond the normal replacement cost of a project—most notably the Investment Tax Credit (ITC). Lenders look to the worst-case scenario, and, in the event that a project suffers a total constructive loss, the United States government could be entitled to claw back the ITC incentive that was granted for the project.
GCube, for example, has met this demand by offering Stipulated Loss Value coverage, whereby the insured declares the full amount at risk in the event of a total loss, including not just the equipment values but also components that were taken into account at the outset to make the project financially viable—such as the ITC.
Furthermore, the explosive growth in distributed solar generation and residential portfolios has changed the way we need to structure our policies, with a focus on bringing about administrative ease. A single 50-MW project in the desert is simple enough to underwrite, but issuing a policy for 1,000 separate 50-kW installations presents an altogether greater challenge.
For clients whose portfolios consist of large aggregations of small solar projects, we now look to streamline the insurance process by putting together a single policy. This can afford the insured greater flexibility, both by making it easier to add new projects and by helping them manage costs by spreading risk more effectively within their portfolio.
In short, the insurance market continues to evolve with the industry and is well positioned to support the ongoing growth of the solar sector, providing an open dialogue is maintained between all parties involved.
For solar installers, it’s crucial that all of the details are ironed out early on in the development of a project. Make sure to keep your insurance broker up to speed with the requirements that your lenders are imposing on you. Brokers and the markets they work with can help make you aware of the costs and difficulties those requirements will incur, and they can even help push back on lender requests that are commercially untenable. It’s far from ideal to find out the day before a project closes that a request cannot be met or that the cost is not viable.
Insurers can offer much more than bankability—such as finding innovative ways to simultaneously cover thousands of projects aggregated under a single owner or covering the lucrative incentives that make renewable energy investment attractive. But, at the end of the day, insurance is also a basic requirement for lenders. Without the right insurance, there’s no project finance, and without finance, there’s no project.
By: Sam Walsh, GCube Insurance Services
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