As the implementation of renewable energies continues to rise, so too do the opportunities for insurers.
The most promising business exists in the solar, wind and biomass energy industries, as well as renewable's brightest up-and-coming star: energy storage.
According to the Washington-based Solar Energy Industries Association, solar energy grew 64 percent and wind energy grew 33 percent in the first quarter of 2016 alone. Biomass — energy deriving from plants and plant-derived materials — accounted for 4.8 percent of energy consumption in the U.S. in March 2016, according to the Institute for Energy Research (IER).
Additionally, in 2017 the energy storage market is expected to grow to an annual installation size of 6 gigawatts (GW), and is projected to explode to over 40 GW by 2022, reports market research firm IHS Markit. (By comparison, in 2012 and 2013 the base installation size was only 0.34 GW.)
The beauty of the renewable energy sector is the ever-changing landscape of the industry. Although some regard this as an obstacle, insurers who view it as an exciting challenge are bound to succeed in this space.
“The main criticism of renewable energy is that it's not consistent and predictable, but every day we see more and more clients looking for ways to close the gap,” says Rose Calpin-Dewey, senior vice president, property unit leader, marine & energy practice at Lockton Cos. “That's exciting. The growth in segments like [energy] storage will drive that, and it will bring in a whole new level of activity.”
Gains in wind and solar
Right now, the Renewable Energy insurance marketplace “really revolves around wind or solar,” says Pete Wilcox, national underwriting officer for renewable energy at Travelers Cos. While all areas continue to grow, solar and wind “seem to present the leading opportunity,” adds Ric Pena, head of energy at The Hartford. “Solar energy is becoming a popular renewable, and investment should continue. Wind power continues to grow at a very rapid pace in the U.S.”
Dramatic efficiency and cost improvements are driving growth in these industries, says Erin Lynch, president of global energy at Beecher Carlson: “The global solar photovoltaic (PV) market specifically has seen a tenfold increase in capacity over the past five years, and we expect that growth trend to continue.”
The uncertain future of fossil fuels, paired with the affordable costs of renewable energy, is driving investments in renewables, say executives — and insurers like Beecher Carlson are gearing up for the need for Renewable Energy coverage to continue to accelerate. “We expect the cost of renewables will continue to decline while the cost of fossil fuels is expected to increase further,” says Lynch.
The physical products being installed — like solar panels and wind turbines — require coverage, as do construction projects for their installation. As technologies improve and costs continue to become more affordable, insurers are taking note. “Solar and biomass can be found in most parts of the country and are becoming more economical,” explains David Barclay, senior vice president and North America energy segment leader for commercial insurance at Chubb. “In addition, the technologies for both have been steadily improving.”
The wind sector continues to be the key driver for the renewable power segment, both with respect to number of operating units as well as projects for the construction of new wind parks, adds Honorio Campos, team leader of engineering at Allianz Global Corporate & Specialty Americas.
The claims picture
Claims activity in the renewable energy space stems from two major causes: weather events and equipment damage. In particular, the solar and wind industries see the most of these types of losses.
“In general, the PV solar market is experiencing an uptick in weather-related losses in North America,” says Lynch. “The majority of those claims are the result of floods, tornadoes and hailstorms.”
Issues with equipment can affect weather losses as well as present their own unique losses. “What also complicates these claims is that the technology is changing rapidly, making older equipment obsolete and difficult to replace,” says Barclay.
“The wind industry sees frequency of blade damage and gearbox failure incidents as projects continue to mature,” adds Lynch. The reported causes of loss, he explains, are often due to poor maintenance, wear and tear, lightning strikes and equipment manufacturer defect.
At Lockton Cos., complications with energy production equipment comprise the majority of claims in the renewable energy space.
“The claims we see are mostly related to lifespan of energy production equipment, such as gearbox failures, turbine blade damage and facility foundation problems,” says Calpin-Dewey. “Though these losses are putting downward pressure on pricing, the insurers that differentiate themselves by anticipating when these are expected to occur will remain competitive.”
Insurers also note that natural natural disasters are an area of concern impacting claims in the wind and solar industries, as they can pose unique challenges for renewable energy farms in rural areas. “We see some non-maintenance related losses, such as wildfires that damage a facility,” says Calpin-Dewey — and due to the fact that many energy production facilities are in remote, rural areas and are more difficult for firefighters to get to quickly, their geographical location may affect rates.
Issues also exist around claims for wind turbines, according to Barclay: “As the physical size of turbines gets larger, the number of cranes large enough to repair equipment becomes smaller, complicating business-income claims.”
He adds that from a liability standpoint, the renewable energy industry sees a large number of claims for injuries to contractors working on site, noise and other nuisance claims from the public, and roof damage to facilities hosting solar panels.
Losses not yet large scale
However, losses have yet to become large-scale enough to impact the traditionally soft renewable energy marketplace. Soft-market conditions continue in this space, and insurers believe that will continue for the foreseeable future.
Relatively benign market losses coupled with continued capital investment and increased capacity continues to drive down pricing, both for new clients and renewals, says Lynch: “The increase in capacity and competition in this sector has created more options for buyers, leading many clients to spread their risk to multiple insurance carriers.”
“It's a soft market that has been declining for the past several years, and I’d expect to see flat to minor increases in rates,” says Calpin-Dewey. “This is mostly because we haven't experienced a lot of global catastrophe losses, and there's an overabundance of capacity and increased competition in the market.”
The state of the marketplace is driving an increase in products and coverages, Lynch adds: “Renewable-energy clients are considering tailored weather-driven risk management derivatives and hedges that can be structured to respond to weather and commodity price indexes.”
Yet most of the competition exists in the solar energy space. There's less competition for wind farms, which are increasingly being consolidated by utility companies — which, in turn, wrap the farms into their existing policies. Additionally, there's less interest from private investors in wind farms because of the scale of resources and cost to create them.
For large utility-scale wind farms, “there's less competition just because of the sheer limits that people are looking for,” says Wilcox. “It's not uncommon for a wind farm to cost $200 million — I’ve seen them higher than a billion dollars. So that really thins out the competition, or competition starts working together to insure those on a quota share-type arrangement.”
“Renewable energy insurers are starting to deploy less capacity on larger property risks,” adds Lynch. “With rates at record lows, insurers are more inclined to offer a quota-share position with other markets in order to dilute their exposure on large programs.”
Energy storage: The next big thing
The ability to take energy that is produced from renewable sources and store it for on-demand use is set to revolutionize the renewable energy space. “When solar and wind energy companies can store their power and distribute it during peak demand times, the economics and reliability of the renewable sector will truly become competitive with traditional power generation,” says Barclay.
“The battery storage segment could potentially be one of the biggest areas of opportunity for carriers,” Calpin-Dewey agrees. “It hasn't become commoditized like wind and solar.”
Six main categories of energy storage, according to the Energy Storage Association, are:
- Solid state batteries: A range of electrochemical storage solutions, including advanced chemistry batteries and capacitors.
- Flow batteries: Batteries in which the energy is stored directly in electrolyte solution for longer cycle life and quick response times.
- Flywheels: Mechanical devices that harness rotational energy to deliver instantaneous electricity.
- Compressed air energy storage: Using compressed air to create a potent energy reserve.
- Thermal: Capturing heat and cold to create energy on demand.
- Pumped hydro-power: Creating large-scale reservoirs of energy with water.