Sunscreen: How parametric insurance can accelerate solar investment

Fossil fuels still account for over 80% of global energy production, and 90% of all carbon dioxide (CO₂) emissions. Greater adoption of renewable energy is needed to hit net-zero targets. The benefits of renewables go beyond decarbonisation. They can foster innovation, create jobs and support economic growth. There are promising investment opportunities across the renewables spectrum. Recent forecasts predict global Environmental, Social, and Governance (ESG) infrastructure investments of up to USD 30 trillion by 2030. Global renewable energy capacity is expected to grow by 7% annually, reaching 7.8 terawatt (TW) by 2035. The bulk new capacity is anticipated to be solar (circa 50% of total additions, see Figure 1), which is anticipated to grow by a compound average growth rate (CAGR) of 10%.

Meeting renewable energy targets requires substantial private sector investment.  However, investors may be nervous about financing a sector so heavily weather dependent. This is an opportunity for re/insurers to develop sustainable risk transfer solutions to support these investments.

As solar farms are dependent on sunlight, bad weather (including frequent cloud cover) will result in irregular energy output. The electricity production projection of photovoltaic (PV) solar cells is commonly based on historical solar irradiation data, which does not remain constant. Climate change will continue to impact weather patterns and atmospheric composition. Natural phenomena and extreme weather events will further cause volatility in PV cells. This volatility extends to PV solar electricity production.

Investors can reduce the risk of inclement weather through parametric insurance. Solar irradiation parametric insurance programmes can compensate the owners and operators of solar energy businesses should their revenues fall short due to the variability of solar irradiation (See Figure 2).

Parametric solar insurance, which indemnifies electricity output shortage per annum due to lack of sunlight, is based on a solar irradiation index as measured by a third-party data provider. The payout structure is based on peak hour output during the observation period. The indemnity is only triggered when the factual electricity output is less than the threshold. As solar radiation fluctuates constantly, the index and associated parametric insurance solution can provide stakeholders with more predictable returns. The index can be integrated as a time-saving automated tool for all solar parametric insurance product needs - including pricing, reinsurance acceptance, and provisional claims compensation assessment (see Figure 3).

Parametric insurance products are designed to be both simple in their structure and responsive in their application. The use of a third party to host the index provides an impartial data source on which to trigger compensation. Parametric insurance bypasses the need for potentially lengthy claims assessments and long time series of past solar power production data (see Figure 3).

The sun shines long in Malaysia.  Average solar radiation in the country is 4.7–kWh/m².  According to the Malaysia Energy Transition Outlook, solar can lead the country's energy transition by expanding its current installed capacity of 1.5GW to over 150GW by 2050. 

To promote investments in solar energy, insurer Etiqa recently launched its Solar Energy Shortfall Insurance (SESI) product , the first of its kind in Malaysia. The product is designed to compensate insured solar farm operators for financial losses due to lower-than-expected levels of sunshine.

SESI includes both solar irradiation as well as the projected energy output to calculate revenue shortfall. It is designed to ensure that only production shortfalls due to a lack of solar irradiation are considered; the impact of unattained targets due to operational and maintenance issues such as breakdown of machinery is excluded.

Swiss Re is very pleased to have partnered with Etiqa in creating SESI. Swiss Re's Engineering Digital platform provides tailored client solutions, such as digital underwriting tools for engineering and construction projects.