By Gregory DL Morris
Solar power is thriving, driven by both popular mandates for renewable energy but also by plunging prices for photovoltaic (PV) cells. Continued low prices for other construction materials as well as plentiful labor are also factors, as is soaring demand for power from any source in both urban and rural areas worldwide. For the most part, underwriters and brokers who serve the renewable power sector say capacity is plentiful for insurance in the sector, and premiums are competitive.
The one exception is the specialized market backing warranties on performance from PV-cell manufacturers. Only a few carriers will write the business because underwriting is complex. Project financiers often require some type of assurance, but risk managers are finding alternative ways of addressing that exposure.
Basically, there are two types of solar power: PV cells, where sunlight creates current, and solar thermal, where sunlight is focused to heat a fluid. Projects using either type are divided into big utility-scale commercial installations, and distributed power projects range from universities, military bases, shopping centers and factories, down to residential arrays.
In PV, the difference between commercial and distributed power is really just a continuum of the size of the array. Thermal, residential and small-scale industrial installations usually use sunlight to heat water for immediate use. On a commercial scale, mirrors boil water in a solar furnace, and that steam is used to generate power. Several such projects are close to completion in the United States.
While the focus of solar-power risk management is on the new technology -- PV cells and solar furnaces -- underwriters and brokers said the bulk of most projects are more pedestrian. Those are little different than placements for construction of a hospital or airport: Builder's risk, third-party liability, marine, delay in startup, all-risk property and liability.
According to the Solar Energy Industry Association (SEIA), "2012 was a historic year, with 3,313 megawatts (MW) of PV capacity installed throughout the year, which represents 76 percent growth over 2011's record deployment totals. The fourth quarter of 2012 was also the largest quarter on record as 1,300 MW came on line, driven in part by unprecedented installation levels in the residential and utility markets."
SEIA and GTM Research forecast that the market will continue to grow at a steady clip with more than 4,200 MW of PV and 940 MW thermal expected to come online in 2013. The association further noted that the United States now has more than 7,700 MW of installed solar electric capacity, enough to power more than 1.2 million American households. Eleven states installed 50 MW or more in 2012, and more than 82,000 homes installed solar across the country in 2012.
"Third-party ownership models continue to support consistent growth of the residential market," said SEIA. "The commercial market installed over 1,040 MW in 2012, up 26 percent over 2011 totals."
Worldwide, Martin Hegelbach, head of utilities and energy casualty at Swiss Re, estimated that there are about 7,000 MW of solar power installed, and $100 billion in total asset value and $400 million to $500 million in annual premiums. "The split is about 50-50 worldwide between PV and thermal," he said.
As solar power grows into a big business overall, it becomes an increasingly attractive sector for underwriters and brokers. "Solar is a multinational business," said Dimitrios Parikos, vice president for the U.S. renewable energy practice at Marsh. "Clients are coming into the U.S. to develop projects, and U.S. clients are going worldwide. Emerging markets are Latin America, the Caribbean and South Africa. Europe is a more mature market, and the U.S. is somewhere in between."
Parikos noted that the project value is significantly larger than the value of just the solar arrays. "There were about $16 million worth of panels installed in the U.S. in 2012, but that was out of $11.5 billion in total project value. Globally, we estimate $91 billion in project value last year, growing to $130 billion by 2021."
For all that, and the huge volume of business that is written for solar projects in traditional builder's risk lines, the attention currently is primarily on PV cell warranties. "This is an extremely hot topic right now," said Parikos. "We are seeing an awful lot of inquiries on this from all along the value chain, the panel makers, the engineering and construction companies, the utilities and the project investors. Backers want to know the project is 'bankable,' so they can make money. The investors and banks handle the credit risk, but they want to lay off the technology risk."
That risk was in the headlines in late March. Most of the panel makers are in China, and one of the largest was Suntech Power, before it went bankrupt in a high-profile collapse. Many industry analysts agree that the manufacturing sector is badly oversupplied and needs consolidation. The risk to projects is that cells usually come with manufacturer's warranties against excessive power degradation over 25 years. If the original maker is no longer around, project investors want insurance to step in against failure of the cells.
"This is not an off-the-shelf form," said Parikos. "There is a lot of manuscripting. There is time to prepare the forms, and underwriting can take 90 to 120 days. It is not cheap, and the economics could be difficult, especially for a small project. But not to have it could be a deal-breaker for a project. As I said, we get a lot of inquiries, and oftentimes the response to our quote is, 'Thanks, but no thanks.' There are other ways to backstop the panels. Sometimes investors will accept a letter of credit against cell failure. Lately, with the price of panels plummeting, people might start to think about them as replaceable components rather than a capital investment needing to be insured."
According to several brokers, only two carriers will write the risk at all currently: AIG will go five years out, renewable each year, and a specialty firm, Power Guard, will go 25 years in five-year renewal periods.
Power Guard is a hybrid operation, part broker, part MGA, part project consultant. About one-third of its business is brokering panel insurance, while two-thirds is after sales service with banks and project development teams. Its core, said Mike McMullen, co-founder and a 2013 Risk & Insurance® Power Broker®, is its proprietary data base. "There are now more than 25 million panels produced, and we track every one of them by its unique manufacturer's number. Our goal is to compile data for risk analysis, protect the banks, and help the manufacturers sell more."
He said Power Guard writes for 14 panel makers and the database tracking all of them for loss ratio makes underwriters "much more comfortable." They need that comfort, because the Suntech flameout was not an isolated incident. "There were about 80 solar OEM bankruptcies last year," said McMullen. "And we hear rumors of new ones every day."
Hegelbach, at Swiss Re, noted that "people think that performance guarantees for PV is sexy, but the main premium in the business lies on the construction side, also business interruption, P&C and weather. By that I don't mean cloudy days, but windstorm and hail. Hail and wind are higher rated because they can be pretty brutal on PV, or on thermal arrays, whether the mirrors are glass or metal."
Despite having had to put two sizable projects on hold this year due to operational and regulatory concerns, on Feb. 27, BrightSource Energy's new facility at Ivanpah Lake, Calif., in the Mojave Desert near the Nevada state line southwest of Las Vegas ran a trial flux, or heat, just below boiling. The facility, which BrightSource claims to be the largest in the world, is expected to produce 392 MW gross for two utilities to serve 140,000 homes when it comes online later in the year. Engineering firm Bechtel, and Google are investors, along with the U.S. Department of Energy. Beecher Carlson is the broker for the project.
"We do an enormous amount of solar, and three times as much wind power," said Rob Bothwell, executive managing director of the national energy practice at Beecher Carlson. "On the PV side we have had no problems securing builder's risk for projects. Rates are aggressively competitive. The energy may be unconventional on the technology side, but on the construction and project management and insurance side, it is not unconventional."
For distributed power projects, Erin Lynch, senior vice president of energy at Beecher Carlson, said there has been a big shift by carriers. "A year or two ago not a lot of markets had much interest in roof-top projects. They saw them as one-offs and not worth the trouble. We have found the key is to write them on a portfolio basis. We go to the market, say this developer expects this many projects of this total value. We negotiate the rate, the terms and conditions, then add each project as it is completed. Some markets have been very enthusiastic. We get messages asking, 'Can we bind this tomorrow?' "
On Ivanpah, Lynch started calling on BrightSource six years ago, three years before ground was broken on the facility. "We developed a wrap, and took it to the market. There was nothing off the shelf, so we spent two years writing a policy, then took it back to the market. Even though the components are all off the shelf, and the only unique thing about the project is the assembly, it was difficult to get underwriters comfortable."
Bothwell added, "markets are willing to participate on an excess basis, but no one is coming close to what we are doing with our key market on primary."
In the long run, James Kubinak, senior vice president of corporate solutions at Swiss Re, said the biggest unknown in solar energy is not PV cell degradation or technology for thermal, but government regulation and funding. "The challenges are not physical or technical but financial and regulatory. A lot of what is going on in the U.S. and Europe, worldwide really, is backed by government subsidies or other support." He wondered if builders and backers can count on that support in a time of sequesters in the United States and a continuing financial crisis in the E.U.
Hegelbach said financing will be a challenge, but stayed optimistic. "We had an account where the original developer could not secure financing, but our client, a major utility, could finish the project because they could pay cash. And that was a large megawatt project. Even so, many times political or tax authorities change the rules, and uncertainty is deadly to this type of project."
GREGORY MORRIS is a New York-based journalist with a specialty in energy. He can be reached at firstname.lastname@example.org.
May 1, 2013
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