Specialty MGA

The unique challenges around insuring solar and related energy solutions

1 June 2023

A version of this article was first published in the June 2023 edition of FA News.

 

The renewable energy industry, and in particular the solar industry, has undergone a massive transformation in the last decade. Huge demand for new solar panels and projects has forced down the price of production, making it an ever more appealing form of electricity generation. While freight costs remain higher, they are far from prohibitive. All the while, the technology underpinning solar power is continually and rapidly improving, its effectiveness and efficiency increasing.

Solar generation capacity

Globally, this has been a force for democratisation in energy production. Instead of relying on national, centrally controlled grids, individuals and communities can increasingly use solar to generate power according to their own needs.

However, the benefits of this are yet to be fully realised in Africa. The International Energy Agency (IEA) has found that while the continent is home to 60% of the world’s best solar resources, it is responsible for just 1% of solar generation capacity. Another recent review found that South Africa and Egypt have the biggest potential with the greatest solar capacity, and that solar could represent nearly a third of all energy production in Africa.

In South Africa, as in much of the rest of the continent, coal is responsible for the vast majority of energy production. With all its implications for pollution and carbon emissions, there is a clear need for insurers to support the drive for the decarbonisation of South Africa’s energy system. Such large-scale changes will inevitably require significant investment.

The transition to renewables

Global insurers are under significant pressure to comply with environmental efforts to reduce carbon emissions, and the biggest players are increasingly pulling out of new coal power plants, new coal mines and even new gas projects. While solar projects are a much more attractive proposition in many ways, there are challenges for the transition to renewables that will need to be considered.

One is that the changes cannot and will not be immediate, and so will have to be implemented in a phased way. Building up enough renewable and low carbon capacity in the energy system will take a long time, and the role of other sources of generation will require careful consideration.

The length of the transition may well be extended, given just how stretched supply chains currently are. This poses a major challenge for both the solar industry and insurers. Manufacturers are simply unable to cope with the level of demand, meaning that parts can take as long as two years to arrive. These delays affect the start time for projects and represent a significant business interruption risk for those insuring solar construction.

Delivery delays also mean that the risks arising from damage to solar farms are much more significant. It is difficult to replace or repair damage, meaning that losses are higher and sustained for longer. Not only this, but relatively low resilience to rising climate risks also increases the chance of damage from extreme weather events. All of this serves to increase the volatility of insurers’ portfolios, pushing prices up.

Beyond getting solar panels to site, insurers will also need to address the challenges posed by the ancillary technologies that will facilitate a transition towards renewable power. The nature of solar power generation is such that battery storage is a key part of making it viable. Like with solar panels, innovation means that battery technology is improving rapidly, and that storage capacity is improving. However, battery sites come with their own risks and insurance needs.

Battery sites are not only expensive but also very exposed to fire risk, and, just as with solar panels, the risks will become more severe as the climate changes. Insurers’ response to these risks almost certainly will mean that insuring batteries will become more expensive.

South Africa is perfectly placed

Solar power represents a huge opportunity for energy operators and insurers alike. Natural reserves mean that South Africa is perfectly placed to make the most of this and leverage solar power to meet climate targets more quickly. Nonetheless, solar power presents a number of unique challenges, which will require insurers to work closely with constructors and operators if they are to be overcome.

You can read the original article on the FA News website:

https://www.fanews.co.za/publication/pdf_298_fanewsjune2023_  

A picture of Philippe Bara from Specialty MGA UK

Philippe Bara

Head of Energy Portfolio, Specialty MGA

Our Expertise

Our energy team can deliver solutions to achieve the best result for you and your client, from the smallest local operators to the largest global conglomerates.

Find out more about how we can help you.

Capacity without boundaries