Perspectives: In the eye of the storm — managing renewable energy nat-cat exposure

Despite the economic and societal impacts of COVID-19, 2020 was an excellent year for renewable energy in the United States. A record 16.9 gigawatts of power was added to the grid, an increase of 85% over 2019. This year we have seen that trend continue, with 9.9GW installed in the first half, marking an increase of 17% over the same period in 2020.

Many of the key renewable energy-friendly states, however, are in areas with high natural catastrophe activity. While natural catastrophes have always been a concern for project developers, the risk has intensified in recent years. Records for severe weather in the United States are broken almost annually, with 2020 producing the most active Atlantic storm season on record, along with a record number of severe convective storms such as thunderstorms with tornadoes and hail, record wildfires and severe flooding.

This leads to a conundrum regarding the principal states for renewable energy. Of the top three states for solar installations, California is susceptible to wildfires, Texas to hurricanes, flooding, hail and wildfire, and North Carolina to hurricanes, flooding and hail.

Texas is also the largest producer of wind energy in the country. The country’s third- and fourth-highest wind energy producers, Oklahoma and Kansas, were the third- and fourth-highest states, respectively, for tornadoes in 2019.

According to the Swiss Re Institute, insurance losses from natural and man-made disasters amounted to $83 billion in 2020, of which $76 billion was caused by natural disasters, up 40% from 2019, with 70% of those losses caused by secondary perils, such as wildfire, flooding and hail. This is important because these secondary perils are increasingly drivers of big losses and devastation as they are less limited by geographic location, thus expanding the possible threat.

For example, the largest known loss for a renewable energy project did not come from a hurricane as many would expect, but from a hailstorm that led to a $70 million to $80 million loss in Texas. While hurricanes occur in coastal areas, convective storms are inland, tending to cover more area and they seem to be increasing in strength. It is not possible to say exactly what weather will do over time, but it’s already the case that many of the most important states for renewable energy are susceptible to this threat and the trend suggests it will only get worse.

How should developers attempt to mitigate these increasing issues? The key consideration for renewable energy asset owners and developers is planning for primary and secondary perils over the lifecycle of the project and constructing projects to address natural catastrophe risk. This might seem like “over proofing,” but if this trend continues, insurers may apply more restrictive terms and conditions to projects that do not meet the necessary standards.

To withstand hail, solar panels can be fitted with trackers that go into “stow mode,” partially helping to shield solar modules from direct hail strikes.

For flood threats, electrical equipment can be raised above base-flood elevation, and drainage systems can be regularly checked to make sure they allow excess water to run off.

For wildfire, vegetation should be kept to a manageable level so the fire is not given fuel.

Precautionary measures such as these, in addition to a thorough and regularly exercised emergency response plan, are critical to mitigate natural catastrophe damages.

This is where insurers can and should play a key part in supporting brokers and their clients in the renewable energy industry. Insurers that specialize in this space are involved in numerous projects across different geographical locations, using different technologies. This enables insurers to gain a broad understanding of potential risks, identify trends that individual owners, operators and developers are often not aware of, and help to navigate and manage the increase in risk that developers are likely to face.

Overall, this is an area where insurers can do more. While the exact nature of any loss is the intellectual property of the insured, the ability of insurers to see wider trends isn’t just important for underwriters but can also inform brokers and insureds of the challenges ahead. Insurers must be more proactive in working with the renewable energy industry and explaining how weather is affecting the market and how it is changing the way insurers view the market.

This is only possible if insurers not only understand the weather trends, but also how the technologies being used may be affected by current and future weather conditions. In-house engineering expertise can help develop insurers’ understanding of the risk and provide feedback to policyholders.

Renewable energy is seen as the future for the global energy industry, but as the threat of weather continues to increase, the success of the renewable energy market will be dependent on the steps that are taken today. The current weather trends require projects to be built with the lifetime of the project in mind. While the most obvious protection for projects is the way they are designed, constructed and operated, these factors are affected by the amount of information that is on hand at the time. It is incumbent upon all key stakeholders to be clear in their positions, allowing lessons to be learned quickly and across the value chain. If the industry can do this, the future for renewable energy will be bright despite the challenges that weather may hold.

 

Melissa Marsh and Kristopher Williams are U.S. renewable energy underwriters for Axis Insurance, the specialty insurance segment  of Axis Capital Holdings Ltd. Ms. Marsh is based in Chicago and can be reached at Melissa.Marsh@axiscapital.com. Mr. Williams is based in Kansas City, Missouri, and can be reached at kristopher.williams@axiscapital.com.