Solar is a renewable energy that has been growing in recentyears, and with that growth has come increased opportunities forinsurance carriers.

Insurers serving the Sunshine State have especially seen theopportunity grow. California has seen large growth in solar thanksto regulatory change, technological advances and financialincentives.

Sunshine state

Solar energy still represents a very small percentage of worldenergy—estimated at approximately 1 percent, according to BP. The growth potential, however, isconsiderable given the emphasis on renewables and, within thismarket, the limited supply constraints of solar. Unlikehydro-electric, which is inhibited by availability of suitablesites, and wind, where objections to turbines have been an issue,solar has no such restrictions.

The sunshine state of California, perhaps unsurprisingly,continues to be the leading solar market in the U.S. with 13,942megawatts of installed solar energy—enough to power 3.5 millionhomes and an estimated market share of 44 percent in 2015,according to the Solar Energy Industries Association (SEIA). Its leadin the solar stakes is not only attributable to hours of sunlight,but a large population, high utility electricity prices and a longlist of state, local and utility incentive schemes. Indeed, solarinstallation investment in the state totaled $7.3 billion in 2015and over the next five years, California is expected to install22,645 megawatts of solar electric capacity—a three-fold increaseon solar installations—according to SEIA.

Government incentives

Importantly, a number of initiatives have been instrumental intransforming solar energy from the choice of the benevolent few tothe most popular option obvious for the financially savvy. Thesolar Investment Tax Credit (ITC) was introduced in 2006 with a 30percent incentive for residential and commercial solar systems. Theresidential ITC allows the homeowner to apply the credit to theirpersonal income taxes on outright purchase and home installation ofa solar system.

A business that installs, develops and/or finances the projectcan claim the credit. It has been one of the most important federalmechanisms to incentivize the deployment of both roof top andutility scale solar energy in the U.S., with an estimated 76percent per annum compound growth in solar installations sinceinception, says SEIA.

The ITC has been extended — most recently late in 2015 — and thecurrent iteration runs until 2023 on a sliding scale to 0 percentand 10 percent respectively for residential and commercialprojects. ITC has encouraged growth of the storage market as the 30percent grant has recently been clarified as available to solargeneration projects that include storage.

In addition to federal policy, California has prospered under aNet Energy Metering system (NEM) that is one of the most favorablein the U.S. This enables residential and commercial customers whogenerate their own electricity from solar power to feed unusedelectricity back into the grid.

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If the home is net-metered, the electricity meter will runbackwards to provide a credit against what electricity is consumedat night or other periods where the home’s electricity use exceedsthe system’s output. Customers are only billed for their “net”energy use. On average, only 20 to 40 percent of a solar energysystem’s output ever goes into the grid. Exported solar electricityserves nearby customers’ loads.

California’s NEM was reappraised in 2015 by the CaliforniaPublic Utility Commission (CPUC), which decided to preserve thesystem while making some changes. These included time of use (TOU)rates for new customers when demand is highest. TOU rates — whichalready apply to commercial and industrial customers — will bephased in for all residential users by 2019.

While there is uncertainty about exactly what the charges willbe — and how this will impact the returns on household solarinvestment projects — it is likely to promote electricity storagevia home battery systems. Homeowners, by pairing solar panels withbatteries, could store electricity generated in the middle of theday and maximize its value by selling it back to the grid duringearly-evening peak hours when demand and prices are highest.

In addition to changes in NEM, the amended Self Generation IncentiveProgram has provided another shot in the arm for storage as 75percent of incentive awards are being made available for storage,with the remaining 25 percent for generation.

The future is bright

In the last decade solar installations have grown by 60 percent peryear while the cost has fallen by more than 70 percent, says SEIA.U.S. solar installations currently total one million and areforecast to reach two million by 2018.

Storage is linked with this anticipated growth in solarinstallations. The energy storage market is forecast to exceed the2-gigawatt mark in 2021 and valued at almost $3 billion, reportsGTM Research. Growth is expected across allsegments — residential, non-residential and utility — but theBTM sector is forecast to account for a larger share of deployment,rising from 15 percent in 2015 to almost 50 percent by 2021.

A BTM system is a renewable energy generating facility thatproduces power intended for on-site use in a home, office buildingor other commercial facility. The sector, like the solarinstallation market, has benefitted from technological advances andlegislation. In California, the CPUC approved a target requiringthe state’s three largest investor-owned utilities, aggregators,and other energy service providers to procure 1.3 gigawatts ofenergy storage by 2020, according to areport by the National Renewable Energy Laboratory.

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The BTM sector is set to benefit as, for example, SouthernCalifornia Edison has completed long-term procurement contracts formore than 100 megawatts of BTM storage to be deployed over the nextfive years from companies including Stem, Advanced MicrogridSolutions, Ice Energy and SunPower. Looking further ahead,California is also starting to open grid programs and markets toaggregated distributed storage assets, says GTM Research.

Prevention and protection

Insurers have been increasingly keen to participate in this growthmarket. Top line growth looks assured but there are challenges tobe met; not least the distinction between the commercial andresidential market.

Loss control can be addressed more keenly for commercial clientswith stipulations such as installation of adequate fire protectionand heating ventilation and air conditioning systems, 24/7surveillance linked to security control centers, secure fencing andbollards protecting the equipment, fire inspections conducted bythe local fire department and clear fire separation.

Such measures are more difficult to incorporate in residentialhomes where fire protection systems are more generally absent. Therapid growth of renewable energy within the residential marketcreates aggregation issues, which is concerning from a wildfire,flood, earthquake, windstorm and hailstormperspective. Adequate modeling of a portfolio for naturalcatastrophes in highly aggregated territories forms a valuable partof the underwriting process.

Underwriters should be mindful that solar storage is stillrelatively new and insurance is not just about protection but alsoprevention. The insurance industry will continue to be presentedwith exciting new risks and opportunities as the solar industrygrows and expands with the incorporation of the latest advances intechnology.

Christina Tom is vice president, inland marine, at AspenInsurance. Opinions expressed in this article are theauthor's own.