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Ep348: Key Risks Shaping the Solar Industry
00:20:52
Jason Kaminsky, CEO of kWh Analytics, discusses key findings from the 2026 Solar Risk Assessment Report, including trends in reliability, insurance and emerging risks affecting solar projects.
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Foreign.
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Welcome to Currents, the Norton Rose Fulbright podcast. Today we welcome Jason Kaminsky who returns once again to discuss the solar risk assessment report prepared by his company, KWH Analytics. I think you've been here at least five years in a row or so, at least somebody from your company. So welcome back and listeners will be familiar with you.
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Thank you as always for having us, Todd, always a pleasure to be here.
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You're welcome. For those who don't remember because been a while. Even if you're a regular listener, maybe you can give people high level. What is the solar risk assessment and why in the world do you guys put this thing together?
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What the heck is it? Yeah, the solar risk assessment. This is year 8, believe it or not. So solar risk assessment, what is it? It is an annual report we publish with a little bit of our research and a lot of other people's research. And, and the goal is to have one page articles, all based and summarized around a key piece of data, but written very concisely and for a business reader. So trying to draw the practical applications between something that a research scientist is doing and a business owner running a company. It's evolved, I say it's evolved over the years and I think a lot of what we thought was really groundbreaking eight years ago we probably just accept as par for the course. And there's always new things that surprise me. So fun for me to read.
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B
If I remember correctly, it's really trying to highlight misconceptions that people have when they're either investing in projects, when they're building financial models that highlight for, especially for lawyers like me who are not actually in the field where there are potentially hidden risks or risks that are overlooked by most people.
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That's right, yeah, they are. It's called the risk assessment. So we obviously talk about risks, but hopefully we also incorporate some solutions or mitigations that folks can do. And this year it's structured around really three themes. So we call it resilience, which is, is it going to operate in the physical environment in which it's placed? Reliability, Is it going to produce the electrons that you think it's going to produce? And this year we have a new section on really emerging risks. So that's some legal risks, some tax risks, but there are no shortage of risks in our industry.
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Well, let's first, let's just talk high level about the industry. Since you've been doing this, obviously the energy transition has progressed dramatically. The number of megawatts that people are doing in renewables have changed, but so has the Makeup in terms of battery storage and the fact that data center demand growth is incredible and projected to keep being incredible and the introduction of EVs. So how has that changed what you focus on and change the report?
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You can't get a renewable energy conversation without talking about data centers these days. So I appreciate you bringing it up. I would say it's probably. Frankly, though, still a little bit early, if I'm being honest. A lot of the data center conversation seems to be about reliability. Right. Three nines or five nines for some of these data centers, I say, have a very unique demand profile, very spiky demand profile. So you need a lot of, I'll call it sort of power cleaning. I feel like a lot of that is probably in next year's report. A lot of these are still being discussed a little bit as construction projects or theoretical or not operated a lot of the AI data centers yet. But there will be certainly different operating conditions and requirements for those assets. Different reliability requirements. Right. Like if you've read our reports or you know, the KWH story, we talk a lot about production estimates and whether or not you're going to meet those production estimates. That's very different than like, are you going to hit a 5:9 reliability threshold. So I have a feeling that will change the nature and tenor of the report in the future years. But this year's report, I would say shockingly little on data centers. Maybe, but I think that's sort of where we are as an industry.
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And what about in terms of risks? I remember when I had your predecessor on Richard, he was harping on hail and hail had kind of thrown a big wrench in the ability of solar projects in specific parts of the country to get the type of comprehensive insurance that lenders just had historically expected. And there was a lot of education that had to go on and also kind of patchwork to figure out how to get people sufficiently comfortable with the type of insurance that was available. Now you guys are more focused. I shouldn't say more focused. Maybe you tell me how big a deal hail is, but maybe people know how to deal with hail at this point and people are now focusing more on fire risk. So what is that? One, does the industry have an accepted way of dealing with hail now? And two, what does the focus on fire mean for the changes that are going on?
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Yeah, when you're right, you also can't get out of a conversation, at least on renewable energy insurance without talking about hail. And last year's report we had I think four or five or Maybe even six articles that were all around that theme. The good news is as an industry we continue to innovate and respond to risks. Right. So people have come out with a lot new research, call it over the last four years. Right. If I think back to when this is maybe covered back in the first sra, call it four or five years ago, about glancing blows on a tracker and how you can use a tracker to mitigate risk, we had an article about like edge hits on the module and what that means. You can go back and read prior history on that. No, I mean hail still happens. We're still putting glass out in a field. And there is one article this year that colleague Nicole published that the takeaway is you can build a asset in a hail prone region and actually mitigate most of that risk. Right. You might need to invest a little bit more in a better module, certainly in better operational practices to make sure you're in stow when the hail is there. But five years ago we didn't even, we weren't even sure you could do that. Right. Build, build a system that is able to withstand some of this mega hill that you're seeing. And now you can. And so the research in the report basically shows there's contours that move out generally from Texas about what kind of investments you might need to make. And I would say culturally as an industry, this idea of investing into an asset upfront and sort of what's the cost benefit of that? We're probably still learning through, I'll say that. But when we look at our dad, the second key loss driver is fire. And my main takeaway from one of our articles this year is that it's not wildfire. So that's good. From an insurance perspective. We're not, you know, correlated against wildfires that are burning down the Palisades. And it's also good that it means a lot of them are caused, they're basically brush fires. Right. A lot of them are caused by equipment, which means we should have technologies and approaches to mitigate some of that risk. And that is thematically discussed in this year's report about visual inspections of solar projects and how you can manage through some of the equipment driven brush fires. Yeah, I mean often we think fire, we think these big really hot wildfires as not the kind of fires that are affecting solar projects today. But they still can catch and sort of run underneath a lot of equipment, which is why we care about it. Those sort of lead to the tail losses which other than insurance company, we
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care a lot about from an insurance perspective, if you put the right mitigants in place, can you get the type of hail coverage that you could get 10 years ago? Or is that, or is that era
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gone 10 years ago? Probably not. So, but I would say five years ago, probably. And that's a little bit due to our operational practices and a little bit due to where the market is today. So maybe let me touch on both of those. Ten years ago you could get a full limit. So you could basically get total loss insurance for hail with very low deductibles and very cheap pricing. I think that era has come and gone. You're never going to see that again. We did go through a period, call it 2019 through 2020, frankly, even up through last year. So what is that? 2025 of sublimited hail insurance. Right. So you can only get 25 million, 30 million, maybe 50 million of limit, pretty significant deductibles and it's quite expensive. What's happened is from a macro perspective, insurers and reinsurers have made money and people flow to profit. Right. So you, it's, you see, if you look at sort of the stats, people go and they put $500 million and they set up a syndicate in London and that's something you can actually do is put together a new balance sheet and then they have premium goal. Right. They want to write 200, 300, 500 million a premium. And this isn't renewable energy, this is just insurance, property insurance. It drives down rates. And we're seeing that now we're in a period that we call softening of more competition for premium. Right. And it drives down rates. So what does that mean? Yeah, in today's market you can get more hail cover for your project and it's less expensive than it used to be. Does that mean that the risks have on the ground have changed? Maybe. Right. I think some of it is that as an industry you've gotten better. But a softer market also often leads to less discretion in the underwriting. Right. The price signal that we like to send as a carrier to a client to say, yes, we think you have a better asset and we are underwriting to that sometimes gets lost in the heat of competition. Right. And selfishly, as a carrier, we like to think you want to work with someone who understands your business and will be with you through the bad times as well as the good times. Maybe I'll say good times for a buyer because rates are cheaper, but you also have capacity. That's pretty fickle, right? That they have a loss. They liked renewable energy this year, next year they don't. And rate recovery can happen quite, quite quickly. So, yeah, sitting here today, I would say, Todd, you can get better coverage for less price. And the trick as a carrier is to try to find those assets that are, that are best in class and maybe for better, maybe for worse. You don't need to really be best in class in today's market. I'd say over the long term, that's probably for the worst because we want people to be building and mitigating risk because if the carrier's not holding it, they're holding it. Right. It's going to end up on someone's balance sheet.
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What does the market look like for fire?
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I'd say similar themes. Most of the outsized losses we've seen as an industry have been hail related. Right. So that still does take up a lot of the attention in the room. But thematically, when there's competition, there's competition broadly.
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Okay, so let's shift away from kind of casualty events and more towards reliability. What are you seeing in the industry in terms of reliability?
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Reliability is one of those fun subjects that I feel like every year there's a new theme, there's a new topic that I'm not aware about. And I often get asked, is there a single issue or is it a lot of little issues? It often seems like a lot of little issues. So this year there's the one that I may say surprised me the most out of everything was there's an article on fungal growth on glass. And I think as a longtime solar guy, you'd always be like, oh, well, there's dirt and it rains and it brushes the dirt off. And this article is basically saying, well, that's not quite enough. You might actually have to like physically scrub this because there's invisible fungus on the glass. And like, that is not anything that I had ever conceived of before reading that article. You know, maybe an unpleasant surprise to many operators out there, but a new theme, right, is sort of how are you managing some of the. Call it soiling more broadly? You know, and then there's. I'm excited to see that we're also getting better ways to detect issues. So we had Raptor Maps contribute, right. They fly drones and they've started extending their drones into substations. Right. And you're beginning to see, okay, well, substations you can actually detect with a signature when they're going to fail. Right. So there's some on sort of tors. I'll call it like torsional twisting on trackers about fuses. There's all sorts of things that continue to go wrong. But on the whole, I think as we identify these, what I find looking backward is the industry has figured out ways to address them for the most part. So new research and then new solutions and then hopefully five years from now we say oh yeah, fungal growth, of course, we know about that, we're taking care of that, no problem.
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How close are the projections now of reliability and capacity to what people project before the projects are built? Because I know in years past when I talked to you guys, you always said there's a consistent overestimation as to how much revenue these projects are going to generate because reliability is overestimated. Production's overestimated, not by huge numbers, but they are overestimated and it's consistent. Is that still the case or are our abilities, because we have a much bigger data pool now to be more accurate being reflected in projections?
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I think it's still the case, although I will say people have begun, maybe more than begun, people are adopting new approaches. And I'll say anecdotally this is not in the solar risk assessment. But I feel like in the past 12 months I've been approached by a few people in finance or asset owners that have said, you know, you put out, we had a different report called the solar Generation Index and that was the first report we put out that said assets were underperforming. I think the figure back then was like 7ish percent and they'd be like, you know, we thought you guys were a little self interested in publishing that because you were trying to sell insurance to protect against it. Like you know, five years on our portfolio is dead on that number like we are performing almost exactly to the figures that you guys said. And yeah, everything we put out is established in data and maybe we have an early signal about what we're seeing. But I'm hearing that theme more and more of just like it's now accepted an asset or a portfolio is going to perform certainly below 100%. And I see the independent engineers and maybe a year or two ago we had an independent engineer contribute about availability, inverter availability assumptions. I see some of those corrections being made in the modeling software and the approaches. So I don't have sitting here today. I would love to see it, if anyone has it like current research that says for a new asset built in 2025 or early 2026, how is that performing? So far I've not seen that personally. But I like to tell myself it's getting better, Todd. I don't have data to support that, but I like to tell myself it's getting better.
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I always thought it had to get better. If I'm asking you. All right, so let's switch then away from the physical to maybe the legal, the accounting, cybersecurity, you know, the things you mentioned as what you consider to be emerging risks, which I consider to be my daily work.
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Your day job, right?
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Yeah, exactly. So what did you guys identify there and what'd you find?
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Yeah, I mean, a couple, unsurprisingly for those in the finance space related to fiac. You know, I've read the rules like a hundred times and I still get confused myself personally about internalizing all of the dates and what the requirements are of all of the dates. And Crux contributed an article, maybe, unsurprisingly, that only 38% of developers feel prepared to handle their requirements. And this is the prohibited foreign entity requirements. That's like one of, I think, three legs of the stool, Todd, correct me where I'm wrong, but compliance. So there's still a lot of complexity there, I'd say, about how people are navigating that. The other, I'll call it tax related theme was cac, who's a broker, surveyed a bunch of underwriters about ensuring basis step up. Right. So there's all these new structures, preferred equity structures or otherwise, where people are stepping up the cost to get a higher tax credit. And it seems like there's an industry consensus somewhere between 20% and 30% step up of what's insurable. Right. They said 25% is sort of where the market is leveling out. So maybe the good and the bad. Right. You're seeing at least some acceptance of general themes, while you have seems like every six months, brand new doses of uncertainty that are coming down the pipeline from the federal landscape. The sort of third category that we included in this year's report was just about compliance, like FERC and NERC compliance. I've been at conferences that honestly, that topic has never risen to the surface. And now they push down a lot of requirements to renewable energy assets and smaller assets. And it seems to be a big theme that if you don't get it right, I mean, this research says you could lose a million bucks a day. It can be very, very significant for something that I've not personally spent a lot of my own time on. And compliance for me is not an area I want to spend a lot of my time on. But seems like you really have to get right otherwise there's huge financial exposure on the back end. I know you're interviewing me, but what are you seeing as it relates to sort of FIAC and preparedness and how people are navigating?
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FIAC is definitely an area in flux and there's a lack of clear guidance in most of it. So the industry is trying to do its best to get through and eventually we'll get clear guidance and the industry's coalescing around ways to make it work. I agree with you on the tax credit. Insurance market's definitely firming up, but there's outliers. It's hard to make any kind of generalization for out for all deals.
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Every deal is a snowflake in its own right. It always is. But yeah, they've not done us any favors by not offering guidance on how some of these regulations are supposed to work.
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It's coming, so it's coming. Stay tuned. I think that's. That kind of sums up the report but just to kind of. To two things. One, for people who want to get access to the report, where do they get it and to what are. For the people who are not going to spend the time to go actually read the whole thing. What are kind of the one or two things you want people to make sure that they understand if you were trying to explain all this to them in one minute?
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Well, answer the first question. It's available on our website kwhanalytics.com and I'm going to sort of cheat on the second question because you can glean a lot from. I forget how many articles we have this year. I think 19, just titles. So if you only have five minutes, download the report, read the. Honestly, you could probably upload it to Claude. I don't know if I should say that but like upload it to Claude and it'll give you the. The 2 minute or the 5 minute, the 12 minute summary, however long you have. But even just read the titles because we, it's. There's a lot of intention that goes into how these are prepped and the titles all include a statistic and they all include a business takeaway and if you read those then you can navigate to the two or three articles you really care about. And I would say Todd as well for people that are new to the industry which hopefully we're bringing in talent because I always hear about labor shortage like go read the last eight years and hopefully this is not perceived as a self serving comment because it's not intended that way, but it's a really, really concise primer on what owners are thinking about and all of the various risks. And as you go back in time, hopefully they become more and more well known risks as we've sort of internalized them as an industry. But I've heard college professors use this and build courses around some of the content. So it is, you know, we write a very little portion of it, we curate a lot of it from others, and they're generally very, very thoughtful and I like to think insightful about what the market is thinking about at any given moment in time. I think next year you'll see more on data centers. We'll see.
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I don't doubt we'll see more on data centers. Probably more on battery storage too.
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Probably more data.
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Thanks for joining us again. And we'll talk around this time of year next year as well, if not sooner.
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Very good, Todd. Appreciate you having me.
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B
You can find us online at www.projectfinance.law or send us an email at currentsordonrosefullbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers.
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Stay ahead of the Currents.