Energy Renewed: Insurance trends for unforeseen events

 

In episode 6 of Energy Renewed, Katie Janik of ICF speaks with Chris Pollack, of the ICF technical advisory team; Sandy Calvert, from insurance advisor Moore McNeil; and Eric Daniels, founder and owner of Sun Cycle, to discuss how to get renewable energy projects back online after an unforeseen event. This episode is the second of three in our series that focuses on insurance and how trends and pricing are impacted by unforeseen events.

Full transcript below:

Katie: Welcome to Energy Renewed, a podcast by ICF, a meeting of the minds and renewable energy where people come together to discuss ideas and synergies to propel the industry forward. I'm Katie Janik from ICF and the host of Energy Renewed. ICF provides technical advisory services to lenders, investors, and project owners for renewable energy technologies and processes. In this podcast series we will consider varying viewpoints ranging from policy topics to equipment components.

In this episode, we are discussing insurance trends related to unforeseen events. Throughout my career as an asset manager consultant, I've seen all sorts of events that derail a project either during construction or operations. Fires, wind, floods, and even pirates holding equipment for ransom. And each time the event occurs, there seems to be confusion around how to work through the insurance process. As context for the insurance process and given the changes the insurance market over the last couple of years, we thought it would be helpful to take a few minutes to discuss insurance trends and pricing. ICF developed a three-part series to explore unforeseen events. This is part 2 focusing on insurance trends. Part 1 was focused on commercial aspects of unforeseen events, and part 3 will be a discussant on the technical aspects of rebuilding and repairing a project.

With us today to discuss this topic we have Chris Pollack from ICF technical advisory team. We have Sandy Calvert from Moore McNeil, and we have Eric Daniels from Sun Cycle USA. Hi, everyone. Let's take a minute for you to introduce yourselves.

Chris: Thanks Katie. Hello, everyone. My name is Chris Pollock. I work here at ICF with Katie. I've been in the energy industry for about 12 years, here at ICF for a little bit over a year. Throughout my career I've worked several roles design, development, consulting, and construction management. I've worked on both thermal and renewable energy facilities, now primarily on the generation side of the business. And several years of my career I've spent actually deployed out in the field. And I'm very sort of interested in this topic. I think over the past few years, there's certainly been an increased focus on this type of event occurring. And to me, it's very interesting to think about ways that this can influence our business. So that is me in a nutshell.

Sandy: Hi, everybody. My name is Sandy. I'm the Senior VP at McNeill, a small insurance consultant agency that just got larger with the merger of Sans Renewable Risk with More McNeill. We're a consulting firm that provide insurance consulting services to banks, investors, and lenders. I have various roles in the insurance industry including a stint at a contractor, a large retailer, an independent power producer. As a consultant, we see a variety of trends in the insurance industry, including unforeseen events and different pricing practices that we're currently seeing in the industry at this time.

Eric: Hi, everyone. I'm Eric. I've been in the solar industry for going on 40 years now. I've been involved in everything from research, design, manufacturing of solar cells, solar panels, designing and installing systems, wind, diesel, solar storage systems, and micro grids around the world. And as founder of Sun Cycle USA, we've been operating in the US since 2015 now and we've audited something a little over two gigawatts of capacity. Our company specializes in field investigations of defects or performance drops that may be related to factory transit handling construction, operation, and proper operation of the systems storm and fire defects. Essentially we get to see the problem cases. Our company also operates in Europe and India through an associate company PV diagnostics and Sun Cycle GMBH in Europe.

Trends in the insurance market

Katie: Great, thank you all for being here today. I've been monitoring projects for almost 15 years. And during that time working with a lot of unforeseen events, a lot of restructurings, rebuilds of projects. But I have to say that I have not seen such movement in the insurance market in terms of trends and pricing as I have over the last probably four years, five years. And so perhaps let's start with what are some trends around the insurance market, and what are some trends that you're seeing with unforeseen events?

Sandy: So ideally insurance industry pricing practices are mathematically driven when they're done well, meaning there's enough data for an insurance industry to understand a risk that they are underwriting. When you consider solar and wind projects until recently and I'd say in the last five years or so, there really wasn't enough data for the industry to understand the kinds of risks that they might be underwriting. If you go way back, pricing was generally pretty high. Probably people don't remember this but maybe 15–20 years ago if you had a small project like a solar or a wind project, pricing was pretty expensive.

But then a number of insurers came into this space and drove pricing down. But those losses had yet to be developed, meaning those losses that we're all familiar with now hadn't occurred quite yet. So we had pricing maybe as low as Grissom's $100 of value, which is really kind of crazy when you consider the types of losses that we're all familiar with now.

Weather and sometimes climatological events take a long time to develop, or the information around them takes a long time to develop, meaning you need maybe 100 years or so of data in order to get a good statistical or mathematical model. But honestly, we don't have that kind of data in the industry to have what I consider a good pricing model for the industry to understand how they should be pricing their product. And as a result, you've seen insurers respond rather dramatically in the last couple of years to some of the weather-related events and some of the equipment events that they've been experiencing.

Most insurers will tell you that they've not made any money at least in the beginning of this industry. There's only a few insurers that will even say that they're currently profitable, which means a number of the insurers that were in the space are no longer available to us as insurers being able to underwrite wind and solar projects. All of us in this industry, in this space, owner operators consultants everyone need a large strong stable insurance industry if we're going to be able to survive, and thrive, and support investors and lenders into the future for these projects.

The renewable industry vs other industries

Katie: So that's an interesting point to think about that the renewable industry itself is rather young. And there hasn't been up until recently there probably hasn't been enough data to help the insurance industry price these policies, and that we're all learning together essentially.

Chris: Sandy, is that specific to the renewable energy field, and does it differ when you think about thermal facilities which they might have not quite 100 years, but maybe closer to that 100 year sort of database of information?

Sandy: Well, it is a little bit specific to renewables versus thermal, but you're right. Thermal has been around a lot longer. The engineering for is well known, practices are well known. And so into a little bit more comfortable. The orders of thermal are maybe a little bit different and they're engineered a little bit different. Large utilities tend to be redundant types of builders, meaning they build to have capacity and power sort of unless you're an ERCOT, I guess available to be able to respond to the grid. So it's a little bit different kind of building viewpoint. But the renewables to your point it's a rather new industry. It's only been around for about a decade with lots of showing up more frequently here in the last five years. And so now creating pain and pinch points for insurers who are trying to underwrite these types of risks.

Eric: If I could add to that, the industry has been around a while. I think as an ex-manufacturer, one of the more significant issues we had to wrestle with was document retention, performance retention of the various products that we introduced over the years. Though the industry is young, there's been a significant amount of new technology introduced over the last 10, 15, 20 years. And today's product is substantially lower cost than what products were 10, 15 years ago. And it's those cost reductions that have enabled such massive growth, and expansion, and increases of scale in both residential and utility size projects.

And so as a manufacturer, we were keeping a rather robust performance data for all of the different technology generations that were introduced. Today's products feature much thinner glass, much thinner encapsulation, much thinner solar cells. And those products are not potentially in some instances as robust as what they're used to be. That said, the vast majority of solar plants and capacity around the world are working just fine. One of the trends from a technical perspective is that industry is considering designing and manufacturing products with specific environments in mind. As an example, modules with thicker glass can perform pretty well when it comes to hill prone regions. Those design features will increase the cost for the manufacturer but may be resulting in significantly lower costs for ensuring those sites if all factors are considered.

Maintaining records and data

Katie: Eric, you bring up a few good points. I think you're right. I think that solar panels in general are more susceptible to hail damage than say a thermal plant I mean, just the characteristics of the equipment. And the other thing you mentioned was maintaining records and having performance data, not only performance data but understanding any kind of alarm notifications that happen at the site and maintaining good records in order to evidence perhaps the production or performance levels of the plant before and after an unforeseen event, providing that data or that evidence to the insurance providers. So if the insurers don't have the data, then the onus is on the owner or the operator to provide the insurers with that data.

Eric: I would think the plant owners and the operators need a thorough and robust capability for with document retention as just an example. We've audited several municipality-owned sites, and in those instances it's not uncommon to have significant staff changes over the life of a solar asset. These things are designed to perform 20, 25 years and beyond. Through those years, the staff changes and a lot of the original design documents, the maintenance records, the component records have a tendency to disappear without robust documentation retention. And so what we often find in order to establish records and do investigations, we have to recreate a lot of the missing documentation including simple things like alarm and maintenance records.

So one of the more significant trends on the technical side are products that are coming out now that facilitate online record retention, third party data retention services all with the intent of maintaining for the asset owners and operators a robust trail of documentation by plant and by component.

Katie: With many of my clients I'm insistent on maintaining records and maintaining data. And I think this is another example of why. I mean, I've always been of the mindset that if you in the future five years from now if you want to sell an asset you need to have all of that data available, easily available for a project rather than recreating deal history. But the insurance process is another reason to do it so that you can benefit from the insurance that you're paying for, and doing so through an organized process. What other trends have you all seen when it comes to either the insurance process or unforeseen events?

Other emerging trends

Sandy: So one of the things that we're starting to see insurers do is to take a closer look at the operation of renewable sites. So as an example, we had a rather large loss caused by a brush fire underneath a solar panel site because the vegetation had not been mowed because the mowing third party vendor couldn't get on the site due to COVID restrictions. It was a lightning strike, a fire ensued, and again another large loss occurred and insurer had to respond to that particular event. As a result, we're now seeing these endorsements called vegetation endorsements that the operator must adhere to the vegetation remaining at a specific level in order to have coverage. Otherwise it voids the coverage.

We are seeing on the wind side a number of what I would call design installation events during construction which have created numerous losses. Without naming a manufacturer, we have one particular design that includes locking codes that have created quite a few losses for the insurance industry. Now we're seeing endorsements to these policies say that there must be two witnesses on site to witness the installation of the turbine in order to see, in order to have coverage during commissioning. We're going to continue to see these kinds of things as lawsuits play out. We're seeing much larger deductibles. As wind turbines get larger so do the deductibles. As people push into areas that they weren't in before East Texas, West Texas, you're now starting to see restrictions on hail or significant restrictions on hail.

Insurers are pretty adept at dealing with earthquake and named windstorm because there's enough information that they feel comfortable getting to the correct pricing. But when we're talking about things like freeze, or hail, or tornado, there's less information and there's more worry around that. If you create worry for an insurer, they try to step away from the loss either with deductibles or with sublimates to those particular types of perils.

Katie: That's interesting. So it's important to keep in mind that insurers are risk averse. And as equipment evolves, Eric mentioned evolving technology, as different events come into play, the insurance industry will evolve with it to try to as you say protect themselves perhaps that's not the right phrase, but to protect against losses.

Sandy: I think insurers in general want to respond to what we call unexpected unforeseen losses. But if you talk to insurers these days, when things happen with enough regularity they cease to think of them as unexpected anymore. And they think more of this as maybe the manufacturing using the insurers balance sheet to underwrite their design issues. And that's really not where the onus should be. If a manufacturer has a problem with designs, so he really want the manufacturer to step up and stand behind their product. We really want the insurer to respond in the rare event that there is a loss not with regularity because if it's with regularity, then that kind of leads you to a different result.

Katie: I like that. That's a good point. Thank you all so much for being here today. I'm happy we were able to walk through some of the insurance trends and unforeseen events.

Chris: Thank you, Katie.

Eric: Thanks.

Sandy: Thanks, Katie.

Go to ICF
Meet the authors
  1. Katie Janik, Asset Management Advisor, Energy

    Katie is a financial strategy professional with substantial project finance experience, particularly in the renewable energy, oil, gas, and financial services sectors. View bio

  2. Chris Pollak, Lead Energy Engineer

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