Last year was unprecedented for the U.S. solar industry for two contrasting reasons. It was the first time that solar accounted for 50% of all new electricity-generating capacity added in the country, but it was also the most destructive year to date for solar installations as natural catastrophe perils such as hail caused large-scale damage.
While there is optimism that the industry will strive to achieve ambitious installed capacity targets, it is clear to all industry stakeholders that another year of damage at the scale experienced in 2022 poses a significant challenge to the future growth of solar.
As a result, it is essential to learn from last year’s losses and develop robust, long-term strategies for mitigating the risks of extreme weather, which threaten to become more destructive as the effects of climate change take hold.
Natural catastrophe is going to worsen
2022 was a noteworthy year for insured and uninsured damage to solar assets. The current pattern demonstrates increasing events in both number and severity. Forecasts of future weather patterns based on current global warming projections tell us that weather-related events of similar, or even more devastating strength are to be expected.
Across all industries, insured property losses due to natural disasters showed a nationwide increase from $74 billion in 2020 to $92 billion in 2021 — both up from the previous 10-year average of $48.4 billion.
Solar panels, with their unique vulnerabilities, have felt the impact of this. In March 2020 a tornado in Louisiana caused an estimated $30 million in losses, while West Coast wildfires between 2019 and 2021 inflicted $67 million in combined losses for the solar industry. Last year, however, dwarfed these losses. Early summer hail in Texas alone was the source of over $300 million in losses.
To contextualize this, the damage proved to be almost 10-times more costly for solar than the damage caused by Hurricane Hanna in 2020. This underlines the fact that, increasingly, extreme hail and rainstorms top the list for severity of weather-related claims, as opposed to more traditionally extreme weather events, such as hurricanes and flooding.
The rising frequency and severity of “unmodeled” events now pose a greater threat to the operation of U.S. solar assets than easier to model perils such as floods and windstorms. Over the last three years, 40 severe storms — characterized by high winds, hail, tornados, and derechos — were recorded.
By contrast, just 13 traditional windstorm events, such as named-hurricanes, were recorded in the same period. Given the susceptibility of solar panels to hail and the increasing regularity of extreme weather that features powerful hailstorms, the solar industry must adapt to secure the bankability of solar projects. The emerging flooding crisis in the Californian Central Valley highlights just how varied, widespread and unpredictable the threats to solar sites are.
Short-term mindsets leave developers vulnerable to natural catastrophe
The prevailing attitude in solar development today does not adequately cater for the increased risks posed by natural catastrophes. Despite multiple solar losses exceeding policy sub-limits (in some case above $50 million), not enough consideration is given to emerging external threats to project viability. This is something that should be thoroughly examined in the pre-construction phase of a project.
Above all, the solar sector is currently being held back by short-term attitudes and insufficient consideration of profit-eroding risks. A significant hurdle, even with the galvanizing support for solar from the Inflation Reduction Act (IRA), is grid constraints.
To meet ambitious timeframes, it is tempting to prioritize achievable grid connection at the expense of other aspects of site suitability. Equally, developing on more affordable land is often a false economy when the assumption is made that cheaper land represents better overall value. It’s likely that underused land in geographically distressed areas will command higher insurance rates to the extent that project viability could be compromised.
While last year’s losses were unprecedented, historic weather data shows that the timing and the location of severe hailstorms was anything but surprising. An important indicator of a potential location’s suitability for developing solar projects should include historic weather patterns; this can be difficult to determine in remote, uninhabited areas. A site that offers a competitive lease and attainable grid connection may eventually prove itself to be unfit for development if it is susceptible to extreme hailstorms and struggles or fails to secure insurance capacity from one year to the next
Problems relating to short-term planning in the solar sector have been compounded by solar supply chain issues. It isn’t just the direct loss through damage that owner-operators must consider now, but also the extended business interruption caused by delays for replacement parts as well as soaring component costs. The combination of these impacts, both during and after a natural catastrophe event, is a driving factor for more costly claims as project downtime hampers profit.
How the solar industry can mitigate natural catastrophe risks
Most insurance contracts are offered on an annual basis and there is rarely any guarantee of insurability after the conclusion of that 12-month period. In an extreme scenario, where a site experiences catastrophic damage and, in turn, a costly claim, there is a chance that the insurance market is not able to offer the cover needed by the project owner, or at least not at what would be considered an affordable price.
Developers must consider how their project will fare during their multi-year contracts. The reality is that insurance, once considered an administrative line item, has become an un-ignorable and unpredictable cost. If the location of a solar site is historically exposed to extreme weather, that exposure is likely to worsen over coming years, in line with the global trend of increasingly severe weather patterns. Selecting a suitable location for a solar project is therefore of utmost importance.
As well as identifying sites that are outside of high hazard areas, developers can work on diversifying their supply chains, building spare part inventory and undertaking other post-loss risk management techniques. As the insurance market continues to harden in response to these losses, project owners need to demonstrate advanced risk management in order to achieve their desired insurance coverage.
In recent times, some developers have underestimated how much it will cost to insure their projects and, consequently, their project has failed to break ground. This tightening in the insurance market has emerged in direct response to the losses suffered in the past three years. There are few retrospective actions that can be taken in order to minimize weather risks at solar projects, making the pre-construction planning phase critical in ensuring that the project is truly sustainable.
The insurance market is a necessary ingredient in assisting the growth of the U.S. solar sector and not just as a method of risk transfer. Project owners can take advantage of their insurer’s network to access spare parts, for instance, or better understand how they can make their projects lower risk.
Last year’s losses are doubtless a sign of an emerging and costly weather threat, not only because natural events are becoming more extreme but also because with each year that passes there are more sites and therefore greater potential targets.