Sciemus, the London-based specialist risk modelling and analytics firm for insurance and reinsurance markets, has launched what it terms a “unique” weather hedging management product, an index-based lack of sunlight insurance cover for solar farm operators.
Sciemus explained that its lack of sunlight policy would pay out when levels of sunshine fall below a pre-agreed amount and is available as a hedging instrument for solar farm operators for up to 10 years.
The lack of sunlight insurance product is index linked, paying out a fixed amount per unit of lost sunlight at the end of a 12 month risk period. The index is calculated on the sunlight either at the solar farm itself, or at the nearest available weather station.
Sciemus has made the product available in Europe and North America so far, and has plans to expand its availability into the Middle East and North Africa (MENA) region later this year.
Lack of sunlight hurts solar farm operators as it reduces both the output and revenues of the operation. Being able to hedge this weather risk and volatility will prove valuable to solar farm operators, giving them a way to protect and smooth revenues if sunlight hours are lower than their budgets forecast.
James Ingham, Head of Renewables at Sciemus, commented; “The problem many solar farms face is that they secure debt financing at the P95 level, leaving a 5% chance that the Annual Energy Production will not be achieved.
“We know the weather can be variable, and if sunshine levels are less than expected then the output of the farm diminishes, yet the farm operators are still obliged to pay back their bank debt.”
Sciemus notes that there are other lack of sun insurance schemes available, but it believes they are typically included in a property damage insurance programme, rather than being a separate hedge.
Sciemus’ lack of sunlight insurance can be purchased as a stand-alone product, which helps to reduce the overall cost, the company says, which could make this type of sunlight focused weather hedge affordable even for operators of smaller solar farms.
Ingham continued; “Our product is a very useful hedge against volatility in the weather and it provides solar farm operators with ease of mind, knowing that regardless of the weather, their cash flow is secured and they will be able to fulfil their debt obligations. And because it is a stand-alone product unconnected to property damage insurance, it is particularly attractive to smaller solar farm operators or those new to the market.”
This type of index-linked weather hedge is likely attractive to insurance-linked securities (ILS) fund managers, who would be attracted to opportunities to provide risk capital to back such a product either on an insurance or reinsurance basis.
Being parametric in nature, based on the actual parameters of sunlight units experienced at the farm, the product also provides effective insurance, as availability of sunlight, through differing degrees of cloud cover, can be correlated with output and thus revenues of solar farms.