No More Surprises: Accurately Assessing Renewables Replacement Costs

As the renewable energy sector experiences rapid growth and technological advancements, asset owners and insurers face a critical challenge: accurately assessing the replacement cost of deployed assets.

In an industry where a single loss event can have significant financial consequences, the importance of precise valuation cannot be overstated. Inaccurate assessments can lead to inadequate coverage, leaving asset owners vulnerable to substantial out-of-pocket expenses and insurers exposed to unexpectedly large losses.

To navigate this complex landscape and ensure the long-term stability of the renewable energy insurance market, it is essential for stakeholders to understand the unique considerations involved in valuing solar assets and to adopt best practices for accurate replacement cost assessments.

The Undervaluation Problem

When solar assets are undervalued, asset owners may find themselves without sufficient coverage in the event of a loss. Sedgwick, a renewables claims adjuster, found that between 2021 and 2022, 85.5% of commercial properties they viewed were underinsured.

This can result in substantial out-of-pocket expenses to repair or replace damaged equipment, putting a strain on budgets, delaying project timelines, and ultimately impacting the bottom line. In extreme cases, inadequate coverage could even lead to project cancellations, or loan defaults.

On the other hand, insurers rely on accurate valuations to maintain a stable risk pool as well as to set appropriate policy terms such as policy limits, sublimits, and deductibles. Undervalued assets can result in insurers collecting insufficient premiums to cover potential losses, leading to unexpectedly large payouts and driving up loss ratios. This can create instability in the insurance market, making it more difficult for asset owners to secure affordable coverage.

Navigating the Complexities of Solar Asset Valuation

When assessing the replacement cost for solar assets, it’s essential to consider several unique factors. Until the recent past, solar panels had consistently moved down the cost curve, with prices reducing with each successive order.

However, with increased demand and strains on the global supply chain, module prices have become more volatile and efficiency improvements less material. Racking and other components should also be evaluated, as their costs may not follow the same deflationary trend. Labor costs are increasing, and with the Inflation Reduction Act (IRA), material changes are expected in the industry. Skilled labor for technical electrical work is often at a premium or backlogged following a loss event.

Rapid advancements in solar technology mean that panels and other hardware from even a few years ago may not be available for purchase today. Newer models with different outputs and form factors may require reengineering, new racking, or inverters, adding complexity to the valuation process. Asset owners should also consider maintaining a spare parts inventory for repairs and smaller loss responses, potentially cross-purposing spare parts across a portfolio or partnering with other solar companies.

Strategies for Asset Owners

To ensure accurate replacement cost assessments and mitigate the risks associated with improper valuation, asset owners should consider the following strategies:

Regular Valuation Reviews: Conduct periodic assessments of asset values, taking into account factors such as equipment prices, labor costs, and technological advancements. Regular reviews help ensure that reported values remain aligned with the actual costs of repair or replacement.

Leverage Industry Data: Utilize industry benchmarks and data to compare reported values against market trends. This can help identify discrepancies and provide a solid foundation for discussions with insurers.

Develop a Loss Contingency Plan: Create a comprehensive plan that outlines the steps to be taken in the event of a loss, including assessing spare parts inventory, identifying sources for replacement equipment, and establishing relationships with labor providers or EPCs that can assist in loss recovery.

Engage in Proactive Communication: Maintain open and frequent dialogue with insurance carriers and brokers about valuation practices and loss contingency plans. Insurance conversations need to begin earlier in the developmental process, such as the procurement/construction phase.

Consider Technology Advancements: Stay informed about the latest technological developments in the solar industry. As newer, more efficient equipment becomes available, asset owners should evaluate the potential impact on replacement costs and adjust valuations accordingly.

The Path Forward

Accurate replacement cost valuation is a shared responsibility between asset owners, brokers, and insurers. By prioritizing precision, transparency, and ongoing communication, the renewable energy industry can create a more stable and sustainable insurance market, fostering greater trust, encouraging market participation, and supporting the continued growth and success of the solar sector.

As the industry evolves, stakeholders must remain vigilant, adaptable, and committed to best practices in valuation. By working together to navigate the complexities of solar asset valuation, we can build a stronger, more resilient renewable energy landscape for the future.

Burack‘s presence in the power-gen space has included both conventional power and renewables, servicing a variety of IPP’s and utilities across every phase of a power asset’s life cycle. In his role at McGriff, he focuses on leveraging market relationships and utilizing his experience to help serve power clients in the design, strategy, and implementation of risk transfer solutions across the renewable energy community.

McFadden is an underwriter at kWh Analytics. Before joining kWh Analytics, he worked at Chubb for eight years in the commercial marine division, writing multi-line middle market risks throughout the United States. Prior to Chubb, he worked at PwC for two years in audit services, earning his CPA license.