Insurance costs for clean energy projects are rising. Here’s what buyers need to know

Today’s clean energy buyers have many considerations in responsibly sourcing electric energy and environmental attributes from new wind and solar energy projects for their organizations. Among the various considerations, buyers must carefully evaluate risks associated with specific clean energy projects, as well as familiarize themselves with their unique property and casualty insurance requirements. Ultimately, organizations interested in purchasing clean energy should be able to identify the following:

• Impact of rising costs of property and casualty insurance on power purchase agreement (PPA) rates in most U.S. markets
• The role of natural disasters and upstream pressures from reinsurance carriers in driving premium increases
• The decreased capacity of insurance providers to offer coverage for large wind and solar projects due to the increased intensity of natural disasters
• Unique impacts to the ERCOT market resulting from the insurance industry’s response to extreme weather

Rising costs

An ongoing trend in the clean energy industry has been an increase in costs associated with developing and operating wind and solar projects. Over the past three years, supply chain disruptions, domestic trade policies, and global inflation have each driven an increase in project construction capital expenditure budgets.

When combined with the rise in cost of project capital, the result is increased PPA prices in U.S. markets. Another sometimes overlooked inflationary impact on PPA pricing has been the rising costs associated with property and casualty insurance for clean energy projects.

Because of an increase in losses attributed to natural disasters, major insurance carriers have experienced adverse underwriting conditions. For example, in 2022 the U.S. endured a record $165 billion in natural disaster-related damages. The renewable energy industry alone experienced 650 claims during this period, and incurred net losses of $800 million, or approximately 0.5% of all property insurance claims in 2022.

As a result, insurers have increased premiums and project developers are feeling the impact. In fact, in 2023, property and casualty insurance premiums rose by as much as 45% for some projects. Over the long term, a sustained 13% annualized escalator in premium costs is expected through 2030. With U.S. average PPA prices for wind up 16% and solar up 21% as of the third quarter of 2023 year-over-year from 2022, property and casualty insurance premium increases have played a lesser but impactful role in this trend of upward pricing.

Another trend impacting premiums for developers is the overall increase in costs associated with reinsurance, borne by primary insurers. In 2023, reinsurance rates increased by between 37% and 100%. These reinsurance rate increases are passed by primary insurers onto project developers in the form of premium hikes. These premium hikes ultimately result in higher PPA prices for clean energy purchasers.

The increase in reinsurance rates is largely attributed to record-breaking natural disaster casualties, but also due to intense geopolitical pressures. These pressures include the lingering effects of the COVID-19 pandemic, wars in Ukraine and the Middle East, and inflation. All the while, a property reinsurance shortfall of between $25 billion and $50 billion continues to be a stressor on the market.

Beyond primary insurers, the increase in reinsurance costs has been passed on to renewable energy asset managers in the form of premium hikes.

On a positive note, while reinsurance rates are expected to continue to rise in 2024, they are forecasted to fall beginning in 2025.

Other trends and drivers

In recent years, the insurance industry has come under increased scrutiny from the public for insuring fossil fuel industry assets. These social pressures have resulted in the majority of reinsurance industry participants designing environmental, social, and governance (ESG) policies that include strong positions on evaluating their own impacts on climate change. Notably, 62% of global reinsurance companies have strategic initiatives to end coverage for coal assets. Meanwhile, 38% are also excluding oil and gas assets.

Social consciousness is certainly a driving factor behind these tactical decisions, and the impact of these choices is expected to be significant. While fossil fuel project developers face this new hurdle to bring projects to fruition, clean energy generation may be positioned as a beneficiary as insurers seek to build their portfolios with cleaner assets.

At the same time, the increased adoption of clean energy resources, combined with the uptick in frequency and intensity of extreme weather events, has led to a dramatic rise in clean energy property and casualty insurance claims over the past 7 years.

A notable example of the recent uptick in significant weather events occurred in 2019, when a single hailstorm damaged 400,000 solar panels at one Texas solar farm, resulting in $70-$80 million in damage. In fact, hail damage made up nearly 60% of claims incurred over the five-year period between 2018 and 2023. According to a report issued by London-based insurer GCube, during this period the average claim per hail incident was $58.4 million.

Limited Coverage

The spike in extreme weather events has caught the attention of reinsurers and primary insurers alike. In response, the insurance industry has been narrowing the property limits being offered for projects in regions where such weather conditions are most prevalent.

This trend is of particular concern within the Electric Reliability Council of Texas (ERCOT) market, where the renewable energy industry has seen rapid growth for several years and many clean energy buyers have transacted. The impacts of several hurricanes and Winter Storm Uri have raised awareness around these concerns. Insurance brokers are responding by capping aggregate property insurance limits at $5 million – a notably small value when compared to the needs of large-scale clean energy projects.

For example, in 2023, a wind project cost an average of $1.3 million per megawatt of installed capacity, while a solar project cost $1 million per megawatt of installed capacity. Insurance brokers working alongside project developers must respond by developing a deck of multiple insurers to provide coverage for individual projects.

As with other cost-driving factors, the reduction in available coverage has an impact on the deductibles of the insured. This has been apparent when it comes to deductibles for insured solar projects in disaster-prone regions. Deductible costs in these regions have hovered at 5% of project replacement costs in recent years. These costs have risen 150% from pre-pandemic levels of 2% of project replacement costs.

As data from future extreme weather events becomes available, it could inform insurers in designing future coverage limitations and deductible increases nationwide. This same data could also be used by developers to mitigate climate-related risks on projects.

The Upshot

The clean energy sector has been heavily affected by a series of inflationary impacts that are resulting in increased capital expenditure budgets for projects and, consequently, an uptick in PPA prices. Project insurance-related costs are one of these factors, with natural disasters and pass-through costs of reinsurance driving this trend. Ultimately, this leads to rising premiums and deductibles, as well as a reduction in coverage limits.

Clean energy buyers should familiarize themselves with these trends and be prepared to ask developers the following questions during the PPA negotiation process:

• Is adequate coverage available in a specific project location?
• Does the PPA pricing structure reflect the real costs of property and casualty insurance?
• Have preventative measures been considered as a way to mitigate extreme weather-related impacts?

In our next article, we’ll delve into these risk management strategies, which can impact the ability to satisfy insurers’ requirements during the underwriting process while also mitigating potential extreme weather-related damage to projects.

Evan Dell’Olio is a Clean Energy Originator with Trio. If you would like to connect with Evan on this topic, please feel free to send him an email here.

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