In the spring of 2019, the sky in parts of West Texas opened up, in some areas dropping hailstones as big as baseballs, according to the National Weather Service. Beyond cracking car windows and damaging rooftops, the hailstorm struck a 180-megawatt solar project developed by 174 Power Global, causing an estimated $70 million to $80 million in damages as ice smashed the project’s panels, made by Hanwha Q Cells.

The event got the insurance market’s attention.  

“That’s really when the market changed overnight,” said Sara Kane, a senior vice president overseeing energy risk management at insurance broker Beecher Carlson.

Solar came up at a time when insurance was relatively affordable and easy to procure. Insurance was never an insignificant cost for developers, according to a 2010 report from the National Renewable Energy Laboratory (NREL). But it’s gotten significantly more expensive in recent years as natural disasters exacerbated by climate change have proliferated. Hurricanes have soaked the South and wildfires have destroyed property in the West, compelling insurers to reckon with what experts say are years' worth of underpricing the risk of damages.

From the end of 2019 to the first part of 2020, property insurance premiums rose between 10 percent and 60 percent, according to the Insurance Information Institute. The change has been particularly acute for solar. Premiums have increased by as much as 400 percent in the last two years, according to a recent analysis by two companies that specialize in analyzing solar risk, kWh Analytics and Stance Renewable Risk Partners.

How insurance will function in a climate-change-impacted future is an open question that policymakers across the United States are now mulling. But there's a distinct paradox in the threat of rising insurance costs hampering solar growth. 

“It would be ironic if one of the possible fixes for climate change can’t move forward just because it can’t get insurance,” said Keith Martin, a transactional lawyer at law firm Norton Rose Fulbright.

Solar, climate change and a hardening insurance market

Simply put, the insurance industry makes money by receiving more in premium payments than it has to pay out in claims. To do so, insurers analyze the risk associated with certain properties and price premiums accordingly. (While there are different types of solar insurance, this article focuses on property insurance, which protects projects from physical damage.)

Because the probability that something will go catastrophically — and expensively — awry is relatively slim for an entire portfolio of projects, insurers can generally make a profit by charging clients premiums and paying out a lower amount of money in claims.  

But in recent years, insurers haven’t seen the level of profits they’d like. So they’ve begun to charge higher premiums, a change in the industry that’s called a “hardening” market. Climate change is expected to sharpen that trend because damages will become more likely.

Within the group of insurers that underwrite solar projects, there’s also been a growing realization of the threats to such projects. Many experts cite the 2019 West Texas hail case as the impetus, but wildfires in California and natural disasters elsewhere have also raised concerns.  

“The view was, for solar specifically, ‘Oh, this stuff just [sits] there. What can really happen?” said Kane, who previously worked as an underwriter for renewable energy projects.

Now, insurers have a greater understanding of physical threats to renewables projects and are correcting for what Kane called “unsophisticated underwriting in the beginning.”

“Honestly, losses have caught up with us,” she said.

A hard market doesn’t usually last forever, but climate change — at least given the current policy environment — is not a problem that’s going away. And experts like Kane and Sam Jensen, a Stance co-founder, say costs aren’t likely to get much more affordable.  

“It’s safe to say, at least in our opinion, that those days are over,” said Jensen.

The current market has created numerous limitations for solar developers and financiers.

Natural-catastrophe-related sublimits (part of an insurance policy that defines coverage on certain types of losses) have shrunk, said Jordan Newman, a managing director at Wells Fargo that works on the bank’s tax equity investments for renewables. That means "the amount of coverage in dollars that you’re able to achieve has gotten lower and costs more,” he said. 

With lower sublimits, banks are seeing an uptick in the number of developers asking for waivers on insurance coverage. And since projects must re-insure each year, even in-service installations are navigating these challenges.

Banks are also giving more scrutiny to the track record of the developer and the location of the project. Financiers and insurers are wary of having too much exposure in one region, especially if it has known natural disaster potential, as almost every region of the United States now does.

Changing underwriting

Taken together, the limitations could impact where developers can site projects in order to guarantee adequate insurance and funding. The situation also calls for a re-evaluation of risk for investors and insurers, experts said.

Developers or an independent testing body will have to work to help insurers understand risk mitigation in solar, in part through better data analysis. Insurers currently pay more attention to location than technology choice.    

“Any new generation of technology is being insured assuming the history of that technology,” said Amy Schwab, a senior project leader at the National Renewable Energy Laboratory and the lead author on a December 2020 report on insuring PV. “It always takes a while for insurance rates to catch up.”

If building out clean energy is a political priority, the federal government may also need to act as “insurer of last resort,” as it does for some flood insurance, said Martin at Norton Rose Fulbright. 

The disastrous weather in Texas that cut electricity for millions in February is the most recent example of climate change’s potential to disrupt clean electricity. Though natural gas accounted for the majority of generation that went offline during the severe cold, Kane said many of Beecher Carlson’s renewables clients have reached out regarding business-interruption insurance. The event may add fuel to insurer concerns about underwriting renewables.

“Any large-scale weather event that reeks of climate change in that it’s unusual and that it’s severe will absolutely trickle its way into underwriting consideration,” she said.

Navigating those challenges will be essential for continued solar growth, a key aspect of the Biden administration's agenda on climate action.  

While climate impacts “are going to be felt across the entire economy,” said Kane, “it feels like a little bit of salt in the wound because the renewable industry is trying to help and getting dinged in the same way as industries that are not actually part of the solution.”