Insurance Protection for Solar Farms

Humans have relied on conventional sources of energy since the time immemorial- be it the coal, wood, gas or oil. We have used and over used these resources in order to fulfil our greedy ambitions and robbed the future generations of their rightful access and claim to these resources. Increased demands to meet the needs of over 7.5 billion humans has resulted in unparalleled levels of pollution in air, land, wetlands, water bodies along with depletion of forests. According to Global Footprint Network, by August 1 2018,humans consumed more resources than Earth could regenerate for the year. In simpler terms, we are now using the resources of close to 1.5 earths in a year.

Waking up to the this reality and seeing the repercussions of our deeds in everyday weather changes, people and more importantly, governments across the world, are talking in sustainable and ‘renewable’ terms. Renewable energy is energy that is generated from natural phenomenon /   processes that are continuously replenished. This includes wind, tides, water, sunlight, geothermal heat,  and various forms of biomass.

Renewable energy often provides energy in four important areas: electricity generation, air and water heating /cooling, transportation, and rural (off-grid) energy services.

Some of the very well-knownadvantages of Renewable Energy are as follows:

  • Green house gases do not get emitted by the use of renewable energysources. This makes it the cleanest form of energy & use of it o prevents environmental degradation.
  • As the source is infinite like winds , sun light , tides etc. , it is very much sustainable & there is no threat for the next generation..
  • These sources are available all across the globe hence it helps countries  becoming  “energy independence”. Dependence on fossil fuel imports  compromise the security of energy supply.
  • It helps in reduction of electricity bill, as it has the potential to save up to 20% of the energy cost.
  • It can be used in remote locations where there is no access to the power cables. Best suited for the hilly areas .

Growth of Solar Power

Among the all renewable sources of energy , Solar has witnessed the much more activity. The  International Renewable Energy Agency (IRENA) released a data & a report collaborated by Bloomberg New Energy Finance (BNEF) and the Frankfurt School’s UNEP Collaborating center (FS-UNEP-CC), show that the generation capacity for renewable energy grew by 8.3% in 2017, as the case was in previous year. The growth in solar capacity alone surpassed the combined new capacity installations of coal, gas & nuclear power.

The reports suggest that, in 2017, global solar photovoltaic (PV) capacity grew by 32%, followed by wind energy growing by 10%. The report also shows that, such growth resulted in huge cost reductions for both the technologies. From 2010-2017, the cost incurred in generating electricity from solar PV fell by 73%.

In 2017, the solar capacity installations worldwide were 98 GW which is in itself a record, surpassing the combined new capacity installations of coal, gas & nuclear power.

In 2018, India has emerged as one of the world’s largest market for solar PV by surpassing a total solar capacity of 26000 MW, showing a great sign for future growth of solar energy.

India is now expected to add approximately 10 GW of solar capacity in 2019 & it is expected that there will be continued growth in private power purchase agreement, in both large scale projects & rooftop according to Andrew Hines, Co-Founder, CleanMax Solar.

Our Prime Minister has made it a priority to electrify all the villages by 2022, & a new target of 227 GW of production of electricity by renewable energy has been set by the Indian Government. In 227 GW, 113.49 GW (around 50%) of electricity will be contributed by solar energy, hence the growth potential of solar energy in India is huge.

Installed Solar PV as on 31st March, 2018

Risk Associated with a Solar Plant

Like any other project , solar fams too faces the risk whih can broadly be categorize at erection & operational level.

At Erection Stage

Construction Risk

Setting up of a solar project is a capital intensive project . There is a lot of movement of material & manpower & in that way  itis the riskiest phase of the project .

The constructionrequires interpretation and compliance with many laws, codes, and regulations. Arranging &movement  of considerable resources, including labour, equipment, and material adds risk factor . There is always a possibility of  property damage or liability caused from various kinds of error during the building of the new project. The frequent loss is reported also of the cracking of panels  when being fixed into place. Breakage & theft in transit or during installation can also come under this category of risk.

Sometimes start-up delays i.e., delay in construction works may lead to huge revenue loss to various companies involved in such projects.

Investor’s Risk

It relates to  the financial uncertainty faced by an investor who holds securities in a specific firm. . Major political & economic events  Can put threat to the expected return

These risks are related to affecting the viability of the project developer as there are various risks related to key personnel, financial solidity, & technical ability to execute on the plans.

Environmental Risk

There are high risks of environmental damage as well due to the expansive size of these solar par, including any liability following such damage.

For example, large solar parks can become one of the reasons for land degradation & habitat loss.Also, Thin-film PV cells contain a greater number of toxic materials than those used in traditional silicon photovoltaic cells which include, gallium arsenide, cadmium-telluride etc. If these materials are not handled properly then these could pose serious environmental or public health issues.

Some other  negative environmental effect are as follows:

  • Energy: The manufacturing process of solar panels is energy intensive .It is due to the transformation of  raw minerals into usable photovoltaic.   Manufacturing requires combining multiple materials with incredible precision to produce high efficiency panels.  All these steps of manufacturing require lot of energy. This is one of the criticism which solar proponents have to face on regular basis
  • Chemicals: To produce solar-grade silicon, semi-conductors processing typically involvesuse of hazardous chemicals. The proper disposal of these chemical is always under question by environmentalist .
  • Recycling: As a normal solar panel expect to have a life span of 25 years or so solar panel recycling has not become a major issue yet. However it would be an issues in coming years.

Financial Risk

As of now the bulk of the solar PV cells are being imported from China / USA , it always carries the risk of fluctuation of exchange rate & related risk.  The trade dispute between US – China is a new risk ..

Political & Regulatory Risk

In India , we do not have an uniform policy across all states. The  regulatory challenges are different & so it the risk. The incentive structure keep on changing &such  policychange  affect the viability &profitability of the project.  .

At Operational Stage

Operational Risk

This risk relates to the period when the project is put in to place erection & it goes in to generation phase.  Operational risks can result from unforeseen and/or negligent events such as breakdown in the supply chain or a critical error being overlooked in the manufacturing process. .

There is always a risk of unscheduled plant closure & it may happen due to various reasons such as lack of resources, equipment damages, or component damages.

Unscheduled closure of plant can really hamper the progress of the project leading solar companies in big trouble.

Performance Risk

There is also a risk of performance i.e., generating lesser electricity than expected because of some technical fault.

Suppose after taking all the technical calculations in place & even after getting adequate amount of sunlight sometimes the performance of the panel can degrade, which can really cost the performance of the project.

Climate & Weather Risk

There is a lot of risks related to not producing of desired electricity due to lack of sunshine or snow covering the panel for longer period of time.

If the lack of sunshine remains for a prolonged period due to any of the climate & weather conditions such as snow fall, windy weather, then it can lead to a reduction of electricity production.

Variability in revenue due to variability in output, sometimes incurring additional balancing charges. Solar projects depend on favourable weather conditions for their power outputs & therefore their revenues.

The variability of the weather means that the volume of power is subject to variation over short & long timescales. The effect for long term viability means that revenue of projects can vary year to year by around 5% in case of solar energy, depending on the region.

Sabotage, Terrorism & Theft Risk

It is also a major risk as all parts of the solar parks are subject to sabotage, terrorism or theft & thus can produce less electricity as expected. Theft, especially, is a major cause of concern among all mentioned here, as in remote locations if the plants are established then there are big security concerns.

The immediate impact of the presence of any of these risk factors is uncertainty around the revenue and profitability projections for the project and thus the financial viability of the project.

Many of the risks mentioned above can be managed through financial instruments and insurance products. For example, weather risks can be mitigated through weather futures and technology risks can be offset through warranties. However, for a relatively young industry such as solar, a lack of engineering studies for actuarial purposes often means that financial risk management products are badly re-purposed from other fields and prohibitively priced.

Insurance Options for Solar Energy industry in India

Solar panel systems, whether they are roof or ground-mounted, are  prone to risk of failure due to various reasons &business organization  can get full coverage of  the  plant /  system that will include risk factors including various manufacturing defects, external events like natural disasters etc.

It is true that most solar products have warranties associated with it. But in a highly unpredictable industry which has seen many component manufacturers/suppliers going out of the market. Having a proper  insurance package significantly offsets the financial risks.

Adding insurance to the solar system can save thousands in repair or replacement costs in case of the misfortune of being damaged or stolen.

It is hereby important to note that there are only two solar specific policies available currently in Indian insurance market by HDFC Ergo & ICICI Lombard which are solar energy shortfall policy & Solar panel warranty insurance policy respectively.

Apart from these two none of the policies are solar specific and insurance companies, in general, provide cover to solar power plant & rooftops under normal property insurance policies such as fire policy, machinery breakdown, business interruption, property damage, public liability etc. which might be insufficient to cover all kinds of losses faced by the solar companies.

Different Types of Insurances covering the risks faced by Solar Energy firms:

Even though solar insurance products might not be standardized yet, demand for solar PV insurance is increasing. In general, large PV systems require liability & property insurance & many developers may opt to add policies such as environmental risk insurance.

  • General Liability Insurance: General liability insurance covers policyholders for death or injury to persons or damage to property owned by third parties. General liability coverage is important for solar system installers, as risk is greatest during installation.
  • Machinery Breakdown: Electrical & or machinery breakdown of any machinery or other equipment resulting in costly repairs or even replacement of the solar panel.
  • Business Interruption: Cover for period of operational downtime i.e., covering the cash flow of the solar business as a result of an insured peril, for example fire or storm damage, machinery breakdown or equipment failure.
  • Property Damage: The solar system owner usually purchases property insurance to protect against risks not covered by the warranty or to extend the coverage period. The insurance covers material damage due to external causes such as fire, theft, vandalism, sabotage, hail damage, snow load, lightning strike, overload, operational mistakes, clumsiness, negligence & theft.
  • Contract Works: Protection against any loss arising from property damage caused during construction of the project. Cover starts while solar panel are in transit to the job site & ends once the job is completed or the owner accepts the work.
  • Employers Liability: Provides cover against the risk of accident from usual workplace risks such as working at height & manual handling.
  • Marine Cover: Covers include Marine Transit for any loss of goods & Marine Delay in Start up to protect from any consequential loss in revenue.
  • Environmental Risk Insurance: Environmental damage coverage indemnifies solar system owners of the risk of either environmental damage done by their development or pre-existing damage on the development site.

Apart from the above conventional policies that are available in the market, there are two policies which are Solar Specific in nature, for example

HDFC Ergo Launched the First Solar Energy Shortfall Insurance Policy in India in the month of December 2017.

This Solar Energy Shortfall policy gives solar project developers the ability to insure certain causes of solar power generation loss.

The newly available policy will provide a missing part of the puzzle by enabling developers to mitigate some of the risks associated with solar development & operation & providing them greater predictability in their investments.

According to the company, this policy is designed to counter non-physical damage related risks that solar projects regularly face. This policy can cover anything from utility-scale farms & green fields across India, to portfolios of rooftop installations for commercial & residential builds.

The causes of generation shortfall recognized under this insurance policy include unintentional errors in the calculation of target production, defects in the insured energy installations, & cases where actual solar radiation falls short of estimates. To claim insurance money, the energy shortfall must arise solely from one or more of these causes.

This policy would pay for the energy shortfall during an energy shortfall policy year, provided that it is reported to the insurance company within 45 days of the end of the applicable energy shortfall policy year.

According to the company’s insurance policy document, the maximum amount HDFC Ergo would pay for a loss arising from any one energy shortfall policy year is the amount shown as the Energy Shortfall Annual Limit in the Declaration/Policy schedule. If the energy shortfall policy year is less than one year in length, the applicable Energy Shortfall Annual Limit would be reduced proportionately.

This policy would not apply to insure installations that are under construction or in operational testing.

Regular solar panel guarantees are:

  • 5+ years product warranty
  • 10 years on 90% performance output
  • 25 years on 80% performance output.

In case a solar system is underperforming or certain PV panels are having some defect, under the guarantee conditions, the manufacturer will support in the form of solar panel replacements or additional PV power.

Now suppose if a manufacturer goes bankrupt or due to some reasons is unable to pay for the warranty he has promised, then to cover such types of risks ICICI Lombard has started to sell a specific solar energy centric insurance policy which is Solar Panel Warranty Insurance Policy.

This policy now covers the solar park developers by insuring the park owners. The standalone insurance product gives comfort to lenders & investors & is a perfect solution to support project finance.

Solar energy is poised to become a key source of renewable energy base in India, in the long run. The viability of solar power projects depends largely on the performance of the solar modules. Also, the risksassociated with this industry are different compared to the conventional power generation sources, such as thermal power plants. Thus, a comprehensive solar panel insurance product would help in covering various risks associated with developing, building, operating, owning, & investing in solar power projects.

This policy is a long-term product in which solar park developer is protected for at least 15 years from the start date of commercial operation of solar parks. This will make the energy transition cheaper & generate more economic value.

The Solar Panel Warranty Insurance caters to solar park developers, with the park owner as the insured & sole beneficiary. The policy safeguards the insured against performance degradation of PV modules, under performance warranty due to the following hazards:

  • Faulty manufacturing
  • Material defects
  • Material ageing

Future Ahead

India continues to be the country having highest GDP growth rate . This coupled with growing urbanization & manufacturing activities are all contributing to India’s energy needs. We are also having a global pressure to reduce the carbon footprint & hence we have to work hard on our pledge to reduce these emissions. India’s government has set itself an ambitious target of generating 40 per cent of its energy from renewable sources by 2030 – with the aim of meeting the country’s rapidly growing demands, which are currently largely met by coal and oil. The country’s heavy reliance on fossil fuel adds strain to our foreign exchange reserve & finances.

The renewal energy sector is labour intensive. It requires a good number of skilled / semi-skilled manpower. As per one estimate India’s expansion of wind and solar power over the next five years could generate 330,000 jobs in areas including manufacturing, project design, construction, business development, and operations and maintenance, according to a report by the World Resources Institute.

As such the solar sector is going to continue as a sector having lot of activities in near future providing good business opportunity to insurance industry also.



Mr. Shubham Singh, Student, PGDM – Insurance , BIMTECH

Prof. Manoj Kumar Pandey,Associated Professor, BIMTECH