Why determining Replacement Costs for your Renewable Energy facility is important?

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As in your personal life with your home or car, your renewable energy facility typically needs to renew its insurance annually.  This might seem routine but the dynamic nature of costs associated with various renewable energy technologies should be considered.  This process is not just about getting the right coverage and affordable premiums but ensuring that should you have to make a claim, you have the correct coverage, limits and information at hand.  Factors to consider when determining the current replacement costs for your renewable energy facility are discussed below.

It is recommended that facility owners review the project as installed to determine the replacement cost based on current industry costs for components, labour, consider any changes in bylaws and debris removal/disposal. An estimate of the removal and disposal costs of the old facility is often overlooked and can run up to 25% of the replacement cost in remote places where transportation costs are much higher.

Some factors to consider the next time you renew insurance for your renewable energy facility:

  1. Is the replacement cost valid?  Do you regularly go to market to obtain more accurate information on the replacement costs as well as removal/disposal costs?  The solar and wind industry has seen a significant downward trend in construction costs while waste removal and disposal costs have been less predictable.  Replacement costs will affect insurance premiums and having current and accurate replacement costs may enhance your ability to collect full funds in the event of a claim and possibly avoid co-insurance penalties. Typically this is done formally every 3 years, similarly to the real estate industry.
     
  2. Following a loss, who owns the damaged equipment during the claims process?  This is an important question to answer.  The system owner may believe they maintain ownership but under the salvage clause within industry standard insurance policies it is the insurance carrier who has control if a claim is paid as they get the funds from the sale of any scrap equipment to recoup some of the losses incurred.   The insurance carrier may share the income associated with the sale of scrap equipment if the owner can do the work.  It is good to have a clear understanding of control over damaged equipment, before you arrange to dispose of it following a loss. Historically, insurers have seen little value in the scrap associated with solar installations as it tends to cost approximately 15% of the overall replacement cost to dispose of the system with not much salvaged.
     
  3. There are advantages to using an independent third party tp assess your replacement costs that is recognized by your insurer and broker.  Typical steps a vendor should use to conduct a thorough review of replacement costs include: 
  • Review of current installation, which may include a site visit,
  • Determine what comparable components would cost in the current market,
  • Estimate the level of effort for removal and the costs of disposal, and
  • Estimate the cost and timeframe for installing a new renewable energy facility.

In the end, getting a better handle on current replacement costs for your renewable energy facility might help reduce premiums at the time of renewal **Side note, check with your lender before reducing replacement costs to ensure compliance with lending agreements.  At the very least, in the event of a claim you will have a better understanding of costs supported by an independent assessment to support your position.  This forward planning will make your life easier should a disaster or other situation out of your control lead to an insurance claim.