Navigating Risk in the Renewable Energy Boom

The Inflation Reduction Act will accelerate the energy transition but also highlights the need for insurance solutions.

By Darryl Harding, Director, Technical Underwriting, kWh Analytics

As seen on propertycasuality360

The 2022 Inflation Reduction Act (IRA) is poised to spur massive growth in renewable energy projects across the United States.

The IRA includes more than $300 billion in funding and tax incentives aimed at catalyzing investments in clean energy infrastructure and accelerating the transition to net-zero emissions. While this substantial growth brings many environmental and economic benefits, it also introduces new risk considerations that must be addressed from an insurance perspective.

One of the key provisions driving renewable expansion is the IRA’s extension of tax credits for renewable energy generation and storage. This includes a 10-year extension of the investment tax credit (ITC) for solar, wind, geothermal and other zero-emission energy sources. It also extends the production tax credit (PTC) for wind and solar projects.

In addition, the bill includes adders for building solar with domestic content and in support of low and moderate income areas. These subsidies provide strong financial incentives for developing new renewable electricity projects. As a result, solar installations are expected to increase by 48% in the next 10 years.

Given the rapid pace of new development, many renewable projects are emerging in areas with heightened exposure to natural catastrophe perils. Solar and wind farms in particular often get built in more remote locations to maximize generation potential. Unfortunately, some of these same locations are prone to severe weather risks like hurricanes, tornadoes, hail storms, and wildfires. And it goes without saying, the larger the project, the greater the potential for catastrophic loss.

“Certain U.S. states such as Texas, have quicker development timelines due to more favorable local regulations,” says Brendan Fountain, vice president of Alliant Power. “When combined with the opportunities in that power market, this makes states like Texas attractive for site selection.”

Unfortunately, Texas also is a state where insurers have experienced some of the most significant natural catastrophe claims to wind and solar projects, Fountain notes.

Some asset owners are venturing into even more unknown territories such as utility scale solar in Alaska. Insurers need more historical loss data and modeling capabilities in these emerging geographies, focusing more on in-depth engineering assessments and catastrophe research to properly evaluate risk.

The interaction of upsized tax credits and catastrophe exposure introduces challenges for insurers taking on these renewable energy risks. Since tax credits can represent a major component of the project’s revenue and value, tightening natural catastrophe sub-limits and coverage limitations can have an even greater impact. This means that natural catastrophe exposures will be more highly scrutinized by the carriers not just for property policies, but when tax indemnity groups review the projects as well.

The good news is that project owners are aware of the severe weather risks, and are making great advancements to ensure projects are operating. Molly Lovelette, Vice President, Alliant Power notes that all project stakeholders recognize that building more reliable projects is in the best interest of this maturing power sector.

According to Lovelette, when it comes to mitigating risk, “Insurers are seeing excellent examples of proactive project owners pushing accountability on Original Equipment Manufacturers (OEMs) to develop better-performing technology in support of active development in these higher exposed regions of the U.S.”

While the Inflation Reduction Act will clearly accelerate the energy transition, it also highlights the need for robust risk assessment and insurance solutions tailored to this changing renewable landscape. Insurers, brokers, and asset owners must collaborate to fully understand the shifting exposures and close coverage gaps.

Proper risk mitigation through resilience standards and loss control will also be critical to long-term success. By addressing these challenges head-on, the insurance industry can support the expansion of clean energy while protecting against natural catastrophe losses.

Darryl Harding is the director of technical underwriting at kWh Analytics, a renewable energy asset insurer.