Home > Property & Casualty > Growth of solar energy eclipses wind power

Growth of solar energy eclipses wind power

solar_workerSolar energy may have just eclipsed wind power. While the latter has long dominated the alternative energy industry, last year marked the first time the U.S. produced more solar than wind energy. According to industry experts, more solar installations took place in the past 18 months than in the last 30 years, with over 6,000 solar companies now operating nationwide. The boom has also led to changes in the energy job market – solar jobs have increased over 50% in the past four years. Furthermore, production costs have fallen by more than half in the last three years. As a result, the insurers have become more adamant with using “functional equivalency” as opposed to “replacement cost”. Underwriters explain this as a valuation system that involves replacing solar panel installations with those that are functionally equivalent to the property that was damaged, which tends to be priced lower than what it had originally cost.

The market is divided into three segments:

  1. Solar contractors who produce and install the solar panels that are needed to generate solar energy
  2. Commercial developers who purchase those panels and sell them to businesses and homeowners
  3. Solar farms that generate solar energy and then sell it directly to power grids or large commercial customers

Insurers typically work with the commercial developers who own, operate and maintain solar energy systems. These companies can provide solar installations to businesses and homeowners, who buy them under special power purchasing agreements. Under the contract terms, homeowners and/or businesses agree to install solar power on their property and purchase the electricity that is generated by the panels at a specific rate, which tends to be lower than traditional power sources. Power purchasing agreements have become increasingly appealing to both customers and commercial developers, especially since both receive tax credits for investing in clean energy. In addition, solar rates paid by the customer tend to be between 10-20% lower than traditional power rates. At the same time, power purchasing agreements allow customers to negotiate annual rate increases, which are also usually lower than traditional utilities. If the solar energy system produces more power than the property owner needs, they can also sell the surplus power back to the developer, which is then sold directly to the power grid.

Still, the solar industry poses challenges for insurers, particularly when it comes to pricing policies and catastrophe modeling. Certain properties may have a greater aggregation of loss due to a higher risk profile. For example, solar panel installations in California or Florida may be more prone to losses based on their exposure to wildfires and/or earthquakes in CA or Flood and Windstorm in FL. This creates challenges for underwriters looking to price those catastrophes and adjusting for various exposure aggregations from single cause of loss. As a result, a property’s probable loss is likely to increase over time during the policy term. Even though the maximum limit for exposure in a policy won’t change, the true exposure to loss within the limit is likely to increase as more installations occur. Therefore, experts say it’s important for insurers to understand each of their clients individual needs based on geographic exposures and changes in valuation over the policy’s period of coverage.


About the Author

Charlie is a Client Executive in the Renewable Energy Clean Technology Practice at William Gallagher Associates working with independent power developers, owner operators and manufacturers in the business of power generation.

617.646.0251 | CLong@wgains.com | Connect with Charlie on LinkedIn

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s