In Episode 24 of Power Players by Origis®, host Michael Eyman and Carol Stark, Managing Director for Aon’s North America Renewable Energy Practice, discuss strategies to reduce insurance costs for large-scale solar projects.   

MEET THE PLAYERS

Carol Stark is Managing Director for Aon’s North America Renewable Energy Practice. She has 30+ years of insurance experience including legal, claims, underwriting and most recently brokerage. Renewable Energy is a global segment for Aon and operates across geographies to drive innovative risk advisory and insurance solutions for its clients.

With twenty years of leadership and operations experience, Managing Director Michael Eyman ensures that Origis Energy Services’ rapidly growing solar and energy storage portfolio performs as projected for owners and communities.

How Did We Get Here?

Eyman kicked off the conversation with the obvious question: why are insurance premiums for solar projects going up as fast and as much as they have been for the past few years?

Stark explained a bit of the history of the solar industry market, which really began at a utility scale in the western states. “As renewables were moving from the West Coast into the Central States, it was a whole different risk profile,” Stark said. “The carriers at the time weren’t taking into account necessarily that risk profile. Losses started to mount, and there were significant losses. The players that were there, several of them exited the industry. Others lost their underwriting capacity and had to go find new capacity. Still others were bought by other companies.”

Stark explained that’s when project owners started seeing double-digit rate increases and sublimits for severe convective storms. You saw higher deductibles for severe convective storms. After several years of these changes, the market is now starting to stabilize.

Since the market has more data for increasingly refined pricing, Eyman and Stark spoke about decisions developers can make from the very beginning of projects to reduce overall insurance costs.

Location. Location. Location: Siting

Stark suggested talking with insurance partners as early as the predevelopment and design phase to avoid issues like flood plains or other soil condition issues.

“What we often do in the predevelopment phase of the project is work with our clients,” said Stark. “If they have a geographic location, we’re going to work with them to say, ‘Okay, let’s move the project or at least the substation 30 feet to the left or a half a mile north or something to avoid those kinds of issues.’ And that makes a significant impact in the pricing terms and conditions.”

Along with resilience measures for a project, another factor insurers can bring into a siting conversation is property liability analysis. Is this county known for being very litigious? What are the rights to seek indemnity from a counterparty?

After geology and geography, meteorology plays a big role in siting risk.

“They [developers] not only need to look at what are the current meteorological conditions, they need to look at what the future meteorological conditions are going to be because this project is being built to last 20 to 30 years,” said Stark. “You need to understand how climate change is going to impact your risk profile, because if you had asked probably 8 to 10 years ago, are the Carolinas cat-prone, you would have been told no. And by cat, I mean, hurricane, severe flooding, etc. You would have said no.”

“But with climate change, we’ve seen significant impact as a result of named windstorms in those areas. And we’ve seen an increasing intensity in those windstorms. So, it’s one of those things we try and take a total project lifecycle approach to it when we talk with our clients to not only talk about the here and now, but the then and what you need to be doing throughout time.”

Pay Me Now or Pay Me Later: Picking Partners

Eyman and Stark discussed picking partners for both equipment and also for contracted services.

“By engaging us early, we can talk about what insurance carriers think of certain manufacturers and what they think of other manufacturers,” Stark said. “We’re not going to name them by name or anything, but there are some instances whereby that makes a measurable difference in the cost of the insurance.”

Stark went on to explain that beyond just the quality of materials purchased, insurers look at processes and procedures for EPC teams in construction and O&M teams for ongoing support to be sure quality materials are maintained for peak performance.

And while these materials may cost a bit more upfront and higher quality contractors can incur larger fees, those costs can be offset by the lower insurance rates over the lifetime of a project.

Timing is Everything: Engage Early and Often

Stark showed a timeline of engagement with insurers highlighting the importance of early engagement to make projects more bankable by advising developers on risk: deciding site conditions, equipment choices, contractors and counterparties, and contractual risk transfer.

“The lenders insurance advisors really can make or break a project too. And by engaging us early, we can help tell your story to those lenders’ insurance advisors,” Stark said. “We can explain the rationale behind why you’re buying the limits you’re buying and why those limits are fit for purpose. And we will give them information to support our choices and your choices around limits, terms, and conditions to make them feel more at ease. Because the one conversation I have on a regular basis with lenders insurance advisors is you’re engaged to help de-risk the balance sheet of the party with whom the lender is engaging. And by making the owner-developer buy more insurance than is necessary for the project, you’re actually creating more stress on the balance sheet than if you were following what is good and reasonable prudent insurance. Let’s take that risk off the balance sheet and let’s do it in an informed way.”

Conclusion

Eyman concluded that a partnership model with insurance could help developers, “So reach out early, get the information, and drive your own outcomes rather than being at the mercy of the market when you reach out after the fact.”

Stark agreed, “Think of your insurance broker not merely as a transactional party but as someone who can help you throughout the lifecycle of your project, to de-risk that project, and make informed decisions, because the better-informed decisions you can make, the better financial outcome you’ll achieve.”

During their conversation, Eyman and Stark discussed strategies to reduce insurance costs for large-scale solar projects.

Three key takeaways developers should consider: 

1. Location, Location, Location – geography, geology and meteorology can require specific risk mitigation strategies to keep insurance costs manageable.
2. Pay me now or pay me later – by picking quality equipment like panels, trackers and racking along with reputable contractors, such as EPC and O&M firms, developers and owners could spend slightly more on upfront costs but reduce their insurance costs over the life of the project considerably.
3. Timing is everything – by engaging early and often with insurance partners, developers can mitigate risks by making projects more resilient, improve overall premiums, and make the entire solar project more bankable.

We’d like to thank our Power Players expert guest Carol Stark and host Eyman for their insightful conversation.

Resources

Solar – The Perfect Storm