What if someone offered you a policy that guaranteed you thousands of dollars if your solar project didn’t come through for you as promised? Such a policy now exists – it’s called “solar shortfall” insurance. Developed and underwritten by Hartford Steam Boiler (HSB), it falls under the broader umbrella of what is known as “energy-savings insurance,” which is designed to give property owners, financiers, and investors confidence that major expenditures on energy-efficient technology will live up to expectations. Such policies are common for large-scale projects, but far less so in the residential end of the market. “This kind of policy is most typical for very large installations, where a 3-to-5 percent deviation in performance over the course of a year is financially meaningful,” says Noah Ginsburg, the director of Here Comes Solar, a program of Solar One, a non-profit green-energy education center in New York City. “That doesn’t make such a big difference for smaller residential systems.” Even so, insurance broker Michael Spain, president of the Spain Agency, has high praise for solar shortfall insurance. “The concept is brilliant,” Spain says. “Hartford is on the cutting edge of insurance policies, and I take my hat off to them.”
A Pioneering Board
The co-op board at 930-unit Georgetown Mews, in Kew Gardens Hills, Queens, decided to take advantage of this new breed of insurance policy. The co-op will soon flip the switch on one of the state’s biggest residential solar projects ever. The $3.5 million job will provide enough electricity to cover demand for roughly half the 38-building complex, and shave a projected $425,000 off the co-op’s annual electric bill. But the co-op’s expenditure on the project – somewhere between $500,000 and $1.15 million, depending on the final tally of tax credits and incentives – is so sizable that board members wanted some assurance that the investment would pay off, says the co-op’s lawyer, James Samson, a partner at Samson, Fink & Dubow. How could they be certain the project would reliably deliver the projected level of savings year after year? The answer was solar shortfall insurance. But in this case, it was tailored specifically for Georgetown Mews, offering broad protections for the project’s 32 separate solar-panel systems installed on 32 roofs. Coverage includes equipment damage caused by everything from terrorism to hurricanes. Most importantly, the coverage ensures that the co-op will realize no less than $380,000 in electricity savings every year.
Minimizing the Risk
HSB, a subsidiary of Munich Re, launched its solar shortfall policy in the United States in 2015, with a focus on states where there are significant incentives for renewables, such as California, North Carolina, and Arizona, says John Stokes, the vice president of HSB’s energy practice. “Anyone who’s investing in these types of products would like to have some reasonable assurance that the debt service can be repaid even if the products don’t perform,” he says.
Georgetown Mews was the first customer of its kind for HSB, in that its solar operation was of a smaller scale than typical clients and involved 32 separate systems that had to be aggregated into one policy, says Marshall Haimson, the president of E-Capital Development/E-Capital Insurance Service, and the broker who handled the Georgetown Mews policy. Georgetown Mews’ project manager, Steve Owen, founder and president of the consulting firm Sol Alliance, was aware that the co-op wanted to minimize the risk on its investment. So he put Samson, the attorney, in touch with Haimson, the insurance broker. Haimson works with a number of energy-savings insurance carriers, but he says HSB is “leading the way” in the solar shortfall niche, partly because of the 150-year-old company’s grounding in engineering and technical expertise.
HSB’s engineers went through the Georgetown Mews project’s technical documents, establishing to their satisfaction that the system was designed and engineered properly, essentially “bulletproofing” the project’s internal economics, Haimson says.
The company also established a value for the electricity the project would generate. In other words, it established a rate that represented the value that would be lost if the system failed to perform as expected. With input from Samson and Owen, the company settled on a value of 22-31 cents per kilowatt hour (depending on Con Ed’s rates) – the rate at which Georgetown Mews will be reimbursed for any production shortfall.
Real-time metering will enable HSB to monitor the project’s performance. HSB requires Georgetown Mews to share the data at least quarterly so it can send someone out if the system is under-performing, Haimson says. At the end of each coverage year, if it is determined there is a shortfall, HSB will cover it, minus a deductible, which is 10 percent of the insured amount. The policy lasts for five years and is renewable; the premium for that entire period is $58,000. “That premium indicates they don’t think they’re taking much risk,” Samson says.
Indeed, significant under-performance on properly designed and installed systems is “really rare,” says Ginsburg of Here Comes Solar, who previously worked in solar performance monitoring for big firms in California. When it does occur, he explains, the most common reason is failure of the inverter, which converts the solar panel output into a current that can be fed into the electric grid. But inverters are usually covered under the standard manufacturer warranty and are easily replaced within a week or two, he says.
Kevin Kaminski, the senior vice president of the alternative energy solutions group for Energi Insurance Services, says his company writes policies to cover solar shortfalls caused by improper system design or installation. The policies are often taken out by the contractors themselves rather than the project owners. “There’s not a lot of demand out there, to be perfectly honest,” Kaminski says. “People are getting more comfortable with solar, and the performance calculations are fairly straightforward.”
Ginsburg, whose organization provides free technical assistance to New York City co-ops interested in solar, cautions that such insurance coverage could be overkill for projects that aren’t as large as the one at Georgetown Mews. One thing boards can do to ease their minds as to a potential project’s production reliability, he advises, is to double-check the numbers put forward by solar contractors using the calculator at PVWatts [http://pvwatts.nrel.gov/], a free online tool provided by the National Renewable Energy Laboratory.
Nevertheless, Haimson and Owen foresee rising demand as solar takes off in the New York City area. They’re talking with HSB about how to replicate the Georgetown Mews policy for future co-op and condo projects. “We might have more of a cookie-cutter approach, without having to go through a full technical review for each project,” says Stokes, of HSB. “We could turn it around more quickly.”