The Texas Hailstorm: A Catalyst for Change in the Solar Industry

By: Bryen Alperin, Partner and Managing Director of Renewable Energy & Sustainable Technologies, Foss & Company

In the wake of the recent Texas hailstorm, which inflicted considerable damage on a 350-MW solar farm, stakeholders across the renewable energy spectrum are reevaluating the implications of hail risk for future projects. Foss & Company is still excited to invest in regions such as Texas, and believes these transactions can be low risk if structured appropriately. This event has not only highlighted the need for investors to structure around extreme weather risks, but has also sparked a broader conversation about resilience, insurance, and innovation within the renewables industry. This blog will outline some of our initial takeaways and recommendations.

Strategic Recommendations for Investors

The recent hailstorm event in Texas serves as a critical lesson for investors in the renewable energy sector, particularly those involved with solar projects. To mitigate risks and safeguard investments against similar incidents in the future, we offer the following specific recommendations:

Mandate Hail Stow Protocols: Investors should consider requiring solar projects in their portfolios to operationalize hail stow protocols. These protocols are essential measures designed to protect solar panels during severe weather events, thereby minimizing potential damage and associated losses. Ensuring that these practices are not only in place but also rigorously adhered to, is a crucial step in enhancing the resilience of solar investments.
Closely Manage Insurance Coverage: A comprehensive risk management strategy should include a well-structured insurance portfolio that combines natural catastrophe insurance and tax insurance. Investors should do ongoing compliance monitoring to ensure that insurance policies are renewed, and coverage does not lapse. Furthermore, investors should understand exceptions to their coverage, and ideally have a strong sponsor guaranty that covers any gaps.
Incorporate Rebuild Covenants: Tax investors should consider the inclusion of covenants in operating agreements that require sponsors to rebuild damaged projects. This stipulation not only underscores the commitment to the long-term viability of the project but also ensures that the asset’s value and its capacity to generate returns are restored as swiftly as possible after a disruptive event.
Diversify Portfolio: Tax investors may want to diversify their portfolios by investing in tax credit projects that are less prone to natural catastrophe damage, such as battery energy storage systems (“BESS”). These BESS projects tend to have much smaller physical footprints, and the equipment is housed within steel containers that are well protected against wind and hail.
Engage with Expert Advisors: Working with expert advisors who specialize in renewable energy investments, such as Foss & Company, can provide invaluable insights and strategies for structuring around risks. These professionals possess the expertise to assess the specific risks associated with solar projects, including those posed by natural disasters, and can guide investors in structuring their investments to mitigate these risks effectively.
Analyze Location Risks: As the age old saying goes, “location, location, location.” Location is everything, especially as it relates to severe weather-events that may affect a solar project. Analyzing the location of a project – and identifying the specific weather or natural disaster related risks that may be associated with that particular location – should be an important step for every investor early-on in a project. Is that project located in the Midwest where there is a risk of extreme weather like hail or tornados? Is the project located in a desert area that has a risk of flash flooding? Is the project located near a fault-line for potential earthquakes or within 100 miles of a coastline and thus subject to hurricanes and tropical storms? Identifying the specific weather or natural disaster related risks that could affect a specific location is important so that an investor can ensure that the proper protocols, insurance, and agreements can be put into place to alleviate any risks.

Relevance for Transferable Tax Credit Investor is important to note that these recommendations are equally relevant for investors who are acquiring transferable tax credits. While these financial instruments may seem one step removed from the physical assets themselves, they are still subject to recapture in the event of significant project damage or failure. Ensuring that projects are well-protected and that sponsors are obligated to rebuild when necessary is crucial in safeguarding the value of these credits and, by extension, the returns on investment they represent.

Immediate Impacts on Insurance Cost and Investor Returns

The destruction of thousands of solar panels by a massive hailstorm, especially in a region of Texas not typically considered high-risk for such events, is poised to send ripples through the insurance markets. As a tax credit investor closely monitoring these developments, it’s clear that securing coverage for hail damage in Texas—as well as in other prone states like Nebraska and Colorado—is about to become more challenging. We anticipate not only an uptick in insurance rates but also a likely reduction in available limits and/or increased deductibles. This recalibration of risk assessment could have profound effects in the coming months, affecting the availability and terms of insurance significantly.

Moreover, the tension between solar project owners and their financiers over hail damage limits is expected to intensify. As the market contracts, finding common ground on adequate insurance coverage will become increasingly difficult.

If the sponsor of this project opts not to rebuild and thus a recapture of tax credits is caused, there could be significant implications for the tax insurance markets. The risk of a sponsor opting not to rebuild has likely been underexplored in underwriting practices, and may now demand closer attention. For projects that are under-insured against natural catastrophe risks, investors and tax insurers will likely become more focused on covenants requiring sponsors to rebuild damaged projects.

It remains to be seen how much investor return expectations may adjust due to these heightened risks.

Innovations and Operational Shifts

This disaster serves as a stark reminder of the need for the solar industry to explore and adopt more resilient technologies. Innovative technologies previously considered cost-prohibitive may gain new relevance. Such innovations may be essential for future deployments in hail-prone regions like Texas.

At a minimum, hail stow protocols may become a standard requirement for asset operators in these regions. Insurance carriers may demand proactive communication about these protocols, and investors may want to add these capabilities to their standard requirements when approving solar projects.

Looking Forward

The recent hailstorm damage to a solar farm in Texas is more than a wake-up call; it’s a catalyst for change. It underscores the urgency of adopting stronger, more resilient technologies and operational practices within the solar industry. As we navigate these challenges, the focus must remain on enhancing the durability and resilience of solar energy infrastructure to ensure its sustainability and growth in the face of increasing climate variability.

The solar industry has proven its capacity for innovation and adaptation. Now, facing the compounded challenges of climate change and market dynamics, it is time to advance those strengths further, ensuring that renewable energy remains a viable and resilient power source for the future.