29 January 2024
Renewable Energy Insurance Market Update
The insurance market for renewable energy is facing both problems and opportunities related to solar power, onshore and offshore wind, and battery storage. The ability of these sectors to adapt, recover, and grow demonstrate that the industry can handle uncertainties. It's expected that things will become more stable in 2024, and insurance costs could go down in good conditions. The energy insurance market is becoming more mature and developing as renewable technology improves and the need for sustainable energy grows.
Solar PV
2023 saw a significant number of natural disasters like hailstorms, tornadoes, wildfires, floods, and strong winds all over the world, from North America to the Middle East to Australia. As these events are becoming less confined to specific regions or seasons, this has put pressure on insurers to manage their NatCat exposure by restricting coverage for these perils with sub-limits and higher deductibles. Pivotal to this market dynamic is the requirement for projects, often driven by lender requirements, to obtain adequate NatCat cover limits sufficient to protect against Probable Maximum Loss (PML) - having enough insurance to cover the worst-case scenario. A few years ago, the renewable energy market provided full limit for weather events such as Severe Convective Storm (SCS), but now, project owners have to get extra coverage at higher costs. The basic coverage might only cover a small part of the potential damage, usually between $10 million to $50 million, depending on how risky the project is. Even though solar power projects are at risk of these disasters, more and more big projects are still being started. The price for insurance has been level in 2023, but more insurance companies are willing to insure these projects because of pressure to support clean energy. In 2024, insurance prices might go down for projects with a good history of avoiding disasters, especially in places where the weather isn't too extreme.
Onshore Wind
In the onshore wind insurance market, the focus has been on high profile technology issues for some of the top Original Equipment Manufacturers (OEMs). The rapid evolution of MW capacity for turbines and lack of standardisation in the commercial race have put a halt to certain models, with the re-engineering required delaying production lines, adding warranty obligations and in some case liquidated damages liabilities to the OEM balance sheet woes. Insurers will be watching closely to see if certain turbine models are reliable or not. There's also a growing concern about older turbines becoming obsolete, as there aren't always new parts available to fix them. This can conclude in longer outages with higher Business Interruption (BI) claims. Insurers are trying to manage their exposure to identified obsolete technology with Actual Cash Value (ACV) and tighter caps on BI indemnity.
In 2023, insurance prices stayed about the same or went up by 2.5% to 10% for older, established turbines. The cost of insurance for newer, bigger turbines depends a lot on how much the business owner has to pay upfront before insurance kicks in. In 2024, it's expected that more OEM turbine manufacturers will be accepted by insurance companies, as the business landscape changes. Making sure contracts are strong and having plans for maintenance and spare parts will be even more important, especially against the the backdrop of global supply chain pressures and constraints.
Offshore Wind
In offshore wind, most insurance markets are being cautious about new technologies like floating wind turbines and experimental projects. In the first half of 2024, we expect only 6 to 10 major insurers to be active in this sector, with about 40 others following along but not leading. The total amount of insurance available for covering Construction All Risks (CAR) Cover on Offshore Developments of Fixed Bottom WTGs and Offshore Sub Stations (OSS) & radial export cable systems, is about $1 billion from the major players, with more available from other insurers. However, this insurance is only available if the projects meet certain quality standards and don't face natural disasters or regional political risks. There's more insurance available for the operational phase, especially for offshore electricity transmission projects in the UK, but this is usually separate from the construction insurance. Insurance prices will stay low and steady for projects that have been operating without any big losses. The cost of construction insurance depends on factors like how big the project is, where it's located, what kind of technology it uses, and the developer's track record. Any developer with a project that's different from the norm should be careful in planning, getting contracts, and budgeting and discuss insurance with their broker as early as possible.
Battery Energy Storage Solutions (BESS)
In the past year, the battery storage sector has grown quickly. Now, many insurers that are familiar with renewable energy are more willing to support not only BESS projects linked to solar and/or wind projects, but also for stand-alone grid balancing projects. After an initial spate of high profile claims, the sector experienced a less volatile year in 2023, though insurers remain extremely cautious about the potential for high temperature thermal runaway fires. Insurers are paying close attention to factors like spacing between the units, whether there are systems in place to stop fires on-site, and making sure the projects meet local fire safety rules.
The Walbrook Building 25 Walbrook London, EC4N 8AW
Let's Talk
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.