Increasingly mainstream, parametric insurance provides coverage opportunities for the full life cycle of renewable energy projects – from financing or delayed start-up risks, through to operational exposures. Read on to learn how parametric cover is a leading differentiator in renewable energy insurance.
What is Parametric Renewable Energy Insurance?
Parametric renewable energy insurance is designed to cover losses or damages to renewable energy projects or assets based on predefined parameters, rather than traditional proof of physical damage.
It relies on specific triggers like weather conditions, production levels, or other quantifiable factors that directly affect energy generation. If these predefined conditions are met, the insurance payout is triggered, making the claims process quicker and more transparent.
Parametric insurance can enable renewable energy project developers to better mitigate risks associated with factors beyond their control, such as natural catastrophes and weather-related disruptions impacting energy output.
Market evolutions for renewable energy insurance
The renewable energy market – such as solar, hydropower, wind, geothermal, and biomass – have emerged as viable alternatives to fossil fuels across the globe. However, natural disaster events driven by climate change threaten infrastructure and carry significant production impacts on the energy industry. In response, innovations within the insurance sector are helping tap into additional reinsurance capacity and fill coverage gaps left by traditional insurers.
Over the past two decades, global consumers, producers, & governments have increasingly embraced cleaner energy sources. According to the IEA forecast, the percentage of global electricity generation from clean energy sources sources is projected to increase by almost 2400 GW, nearly 75% between 2022 and 2027, and according to ETIP SNET, renewable energy will provide 85% of global electricity generation by 2050.
Image: Global electricity generation from renewable energy and fossil fuel, 2015-2027, (Source: IEA 2022)
To balance the projected energy demand with ambitious climate targets in the Paris Climate Accord set by member states, the share of clean energy sources in the global power sector needs to be rapidly scaled up. Thankfully, many countries agree that significant investment in renewable/ clean energy is crucial in order to secure a clean energy transition that limits global warming to 2°C. As a result, we can see a significant increase in the investment in clean energy globally between 2015 to 2023.
Image: Global energy investment in clean energy and in fossil fuels, 2015-2023, Data Source: IEA, 2023
For example, government initiatives in Asia-Pacific for solar panels, such as 20-year-feed-in-tariffs with quality counterparties, have also shown positive signals for solar installation. In 2018, an estimated USD 150.2Bn was invested in renewable energy in the region, and cumulative solar photovoltaic capacity is expected to triple to 35.8 Gigawatts by 2024. In addition to this, Asia-Pacific green energy investment is predicted to grow to $ 1.3 trillion by 2030.
However, continued market hardening, Nat Cat exposures, and climate change pose non-negligible threats that hinder investment and the continued development of the renewables sector worldwide. Recent loss examples include the collapse and severe damage of all six wind turbines installed at a wind farm on Miyakojima Island in Japan following Typhoon Maemi, or the USD 80M in losses for a solar farm following a single hail event in 2019 West Texas – underscore the need for a revolutionary approach in renewable energy insurance to better protect clean energy investments and assets.
Insuring Renewable Energy – Challenges & Opportunities
Renewable energy projects face different risks throughout their life cycle. This dynamic risk exposure can contribute to a complex insurance environment that necessitates detailed knowledge and understanding from all players involved, from developers and contractors to investors and insurers. Renewable energy insurance faces headwinds especially in the following project stages:
1) Project funding:
Challenge:- Renewable power generation is dependent upon natural resources that are uncontrollable by human activity, at times limiting their use or efficiency. Wind fluctuations, lack of water resources, solar radiation shortfalls, demand volatility due to mild winter, etc. can all lead to revenue variability. Traditional insurance models struggle to account for these dynamic variables, leaving projects exposed to complex risks and revenue loss. Because of this inherent intermittency, renewable projects are often considered somewhat risky by investors and can face difficulties in securing financing.
Opportunity: Parametric solutions offer insurance coverage against renewable yield volatility by linking renewable energy input to the price per unit of asset dependent output. Customized precisely to client’s production locations, turbine or power generation technology, and historical yield – parametric renewable energy insurance protects against loss of income due to an excess or lack of natural resource. This new generation of renewable energy and insurance products operates through a straightforward, index based solution that triggers based on objective, third-party data.
2) Start-up delays:
Challenge: Disruptions, delays and non-damage business interruption caused by meteorological risks (windstorms, inclement weather, etc.) represent a significant exposure for renewables projects. This issue is even more acute for offshore projects as they face a broad range of special challenges related to the aggressive maritime environment. It also constitutes a key challenge for previous renewable energy insurance initiatives.
Take, for example, the construction delays experienced by a wind farm developer due to high wind conditions. While the client had budgeted 20 days of weather delay in a tight 6-month schedule, wind conditions left cranes inoperable or forced postponement of lifts to a resource-constrained night schedule.
Opportunity: Acting as a financial hedge, parametric covers can be structured to payout when weather conditions reach certain thresholds that will impede operations – providing developers certainty of liquidity to help cover additional costs.
3) Lack of historical data:
Challenge: Off-shore or on-land, natural hazard coverage for the renewable energy sector has proven to be a challenge for traditional insurance. A lack of historical claims data makes this challenge particularly acute.
Opportunity: Advances in technology, risk engineering services and expertise related to the reporting and detecting Nat Cat and weather related events enable parametric insurance risk models to significantly improve underwriting capabilities.
The power of parametric insurance to propel the global renewable energy transition
With a growing and extensive product offering against all Nat CAT perils impacting renewable energy projects, parametric insurance provides a means to supersede gaps in the traditional renewable energy insurance marketplace. This enables better protection of public entities and businesses against climate change.
How Parametric Renewable Energy Insurance Works?
Image: Three steps about how parametric insurance works
Unlike traditional renewable energy insurance, which relies on lengthy loss-adjustment procedures, parametric insurance pays out when a predefined event (i.e. flood, cyclone, earthquake, etc.) occurs as measured by a specified parameter or index such as rainfall, wind speed or peak ground acceleration.
Driven by objective data and real-time monitoring from ground-based sensor technologies, radar, and satellite imagery, parametric insurance allows clients to manage risk and guarantee liquidity via swift and direct pay-out following a qualifying event.
This new generation of products and services complements or replaces traditional insurance at a more affordable premium that fits within contracting budgets, not on-top. With no on-the-ground loss adjustment required, a parametric cover keeps costs low while offering clients precise protection.
The Advantages of Parametric Cover for the Renewable Energy Industry
Swift Payouts:
Within the renewable energy sector, downtime can lead to significant revenue loss. Descartes Parametric insurance ensures swift payouts, allowing companies to resume operations without prolonged financial setbacks. Parametric cover can apply to the full financial impact of a loss event, including intangible losses, not just physical.
Customized protection:
Parametric policies can be fully tailored to suit the specific needs of each renewable energy project. Insured renewable energy assets in Nat-Cat-prone areas receive bespoke structures designed to fit each project’s exact needs.
Transparency:
With clearly defined parameters, renewable energy clients know exactly what events will trigger their coverage, eliminating disputes over claims and ensuring transparency in the insurance process.
Enhanced Risk Mitigation:
Descartes parametric insurance for renewable energy clients incentivizes proactive measures to mitigate risks, such as reinforcing wind & solar energy companies to withstand fluctuations in production, as well as the impacts of natural catastrophes on exposed assets.
Off-shore wind yield & typhoon exposure, filling gaps in the traditional marketplace
Challenge: Wind generation output can fluctuate by 20% from one hour to the next, leading to substantial annual variations in yield & revenue. An offshore wind company developing a new site in Taiwan faces typhoon exposure as well as future cash flow uncertainty due to inherent wind volatility. The wind farm must purchase renewable energy insurance as part of the terms set by its financing parties. This includes proof that the new site will be covered against loss of revenue due to lack of wind resource. The traditional market does not offer coverage for lack or excess of wind, thus the company must find an alternative solution in order to continue construction.
Parametric Solution: The wind farm opts for a dual-trigger parametric policy that pays out when power generation does not meet pre-agreed thresholds, or when a typhoon surpasses a particular wind speed at asset locations. The swift payout enables business continuity and guaranties an economic balance towards all financing parties. Exposure of the offshore site is monitored in real-time by satellite data. The policy is customized precisely to the wind farm location, exposure, and turbine technology, and structured based on decades of data. This reduces project risk and leads to increased profit security.
High hail exposure for solar development in remote area of Australia
Challenge: A PV plant was recently developed at a remote location where existing hail data maps lack precision due to poor data availability. The traditional market responded by imposing high deductibles and reduced limits after similar PV plants suffered losses in 2019 due to equipment damage and subsequent business interruption following a tennis ball sized hails across Queensland.
Parametric Solution: Regardless of where a given solar farm is located, technology advances related to the reporting and detection of hail events (e.g. doppler radar, satellite imagery, on-site sensors, etc.) enable parametric insurance providers to more accurately model and underwrite hail risk. The parametric approach also incorporates asset-specific factors and models the underlying phenomenon directly, rather than pricing policies based on limited historical loss data. This overcomes shortfalls in the traditional renewable energy insurance marketplace, minimizes basis risk, and provides renewable clients with swift payout and fairly-priced coverage that most closely represents their experience during a hail storm.
