why your assets may be over-valued
Introduction – Chinese action prompts fall in solar panel prices Recent years have seen record-low energy price bids from solar projects, from 5.71 cents/kWh in the USA to 2.42 cents/kWh in Dubai1. With solar energy costs now frequently lower than fossil fuels, it should come as no surprise that a key driver behind the success of the technology is the continually falling cost of solar panels.
In June China issued a bulletin which stated that, with immediate effect, the allocation of quotes for new solar projects was halted until further notice. The intention of that curtailment was, among other things, “promoting the solar energy sector’s sustainable development”. Following this announcement some 20GW of planned solar capacity in China is expected to be scrapped. The knock on effect: the cost of panels from China has dropped substantially.
Nine of the top ten suppliers in the world are Chinese run companies. In 2017 alone China brought online 53GW of new solar capacity - five times more than the next largest market (the US)2. JinkoSolar, the number one global supplier, has tripled its in-house production capacity since 2015, with other major suppliers expanding in a similar fashion. Understandably, manufacturing expansion is long-tail, and despite signs that future investment is falling away, it is expected that there will be a glut of excess capacity for some time yet.
Economies of scale benefits The industry is seeing the benefit of economies of scale in all aspects of the supply chain. Driven by expansions in manufacturing, the cost of polysilicon has hit a record low and is expected to stay that way. In addition to this, the technology itself continues to be refined, with panels now being lighter and more energy efficient than ever before. Owners and operators of solar parks stand to benefit from this situation. The cost of panels as a percentage of total build cost can be anywhere between 25% and 45% of a projects total cost. A plant built only 1 year ago could be over-insured by as much as 30%, and a plant which has not been valued for 5 year could be over-insured by up to 2.5 times the necessary amount. Even sites which are subject to project finance can, through employing a party valuation service, reduce the insured value of their site, resulting in premium savings.
Conclusion – the insurer challenge The challenge for insurers will be to ensure that the way they model and rate solar parks continues to be sustainable. Whilst panels make up the majority of the value of solar parks, they do not necessarily make up the majority of claims.
Oliver Warren is an Account Executive in the Renewable Energy division at Willis Towers Watson in London.
1 https://cleantechnica.com/2016/09/20/lowest-ever-solar-price-bid-2-42%C2%A2kwh-dropped-abu-dhabi-jinkosolar-marubeni-score/ 2 https://www.cnbc.com/2018/04/06/china-becomes-a-driving-power-for-solar-energy-with-86-point-5-billion-invested-last-year.html
