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Ontario's Green Energy Act has created new and rapidly evolving business models for alternative energy in Canada. But is the insurance industry in step with these developments?

Brynna Leslie on April 18, 2011

Zbigniew Barwicz is your typical venture capitalist. He’s got a keen eye for opportunity and an appetite for risk. Barwicz has spearheaded several manufacturing start-ups in the Greater Toronto Area (GTA), linked to high technology and electronics. When the Government of Ontario’s Green Energy Act (GEA) received Royal Assent in May 2009, Barwicz didn’t waste any time jumping on the renewable energy bandwagon.

“Solar is proven technology with proven operations in many jurisdictions,” says Barwicz.

Six months after the GEA became law, Barwicz partnered with three others to launch PURE Energies, a solar panel installer and operator based in Markham, Ontario. It’s one of hundreds of firms that have popped up in the past 18 months, looking to tap into Ontario’s lucrative Feed-In-Tariff (FIT) and MicroFIT programs, which offer revenues to those who can harness the power of wind, solar, hydro or biomass and feed it back into the electricity grid.

“The Government of Ontario now has one of the most generous feed-in-tariff programs in the world,” says Marc Puddy, a partner at Jones Brown Insurance Brokers & Consultants in Toronto. “There are businesses flooding into the province.”

The capital costs associated with renewable energy start-ups has led to the creation of some unusual and complex business arrangements in the province, causing many in the insurance industry to scratch their heads. Individual homeowners, for example, who install solar panels, plug into the grid and generate income, essentially turn their homes into businesses. New personal lines have had to be created to accommodate these homeowners-cum-business owners.

It gets more complicated when homeowners enter into a third-party business relationship with firms like PURE Energies because it’s not always clear who’s liable for what.

“You’re going to have people put these things on their rooftops and that’s fine and dandy if they’ve purchased it. The insurance companies seem to be able to wrap their heads around that,” says Puddy. “But then you have these businesses leasing the residential rooftops, owning the systems on the homeowner client’s roof, and giving the homeowner money per month. It’s when the system is not owned by the homeowner, the insurance companies get a little nervous.”

Emergence of Aggregators
PURE Energies, for one, has successfully adopted this aggregate business model used in Europe for decades. Put simply, aggregators lease out hundreds of roofs, providing capital to homeowners who want to adopt green energy. They install the photovoltaic panels, connect them to the grid, monitor, maintain and collect revenues on them for twenty years. At the end of the lease period, they hand ownership over to the homeowner.

It’s not exactly what the Ontario government envisioned when it launched the MicroFIT program, geared toward individuals and small businesses generating less than 10 kilowatts of electricity from wind turbines or solar panels. An amendment to the act was made last year, forcing aggregators like PURE Energies out of the micro program and into the regular FIT program. The insurance industry, too, has been caught off guard. While some of the big underwriters have been able to provide an extended personal line package to protect homeowner clients who own their own solar systems or wind turbines, many are not sure what to do with these third-party arrangements.

“I think what’s happened is that insurers have worked as hard as they can to understand the MicroFIT program,” says Paul Taylor, Director of Operations at the Insurance Brokers Association of Ontario (IBAO). “But the emergence of these aggregators has added a twist to what was initially described or envisioned, and I think it will be another three or four months before insurers begin to understand how to respond.”

The Insurance Bureau of Canada, the national industry association representing property and casualty (P&C) insurers does not yet have a policy on these types of business arrangements.

“We may take a position on this in future,” says Mark Klein, spokesperson for the IBC. “But at the moment we are watching to see if this becomes an issue that predominates. Our member companies make their own decisions on how to respond.”

While some insurers are in wait-and-see mode, others are taking tentative steps into this new market.

Royal & SunAlliance (RSA) Canada announced its green package last summer. The Dominion introduced a product in January tailored to participants of MicroFIT.

“Our initial program is not meant for these types of lease arrangements,” explains Rick Wirkowski, vice president of personal lines at The Dominion. “It is meant for the homeowner, who installs a panel and sells [energy] back to the grid. That was the crux of MicroFIT. There may be other opportunities in future and depending on how things go, we’re going to have to be flexible.”

Chubb Insurance Company of Canada, on the other hand, appears to be embracing this new market in personal lines. Its GreenWise residential coverage, launched in the US in 2008, a full year before the GEA, is one of the most comprehensive on the market. It offers homeowner clients extended property and liability coverage on solar, wind or geothermal units they own, as well as up to $50,000 of income interruption insurance. At the same time, Chubb is supportive of their personal lines clients entering into contracts with aggregate firms.

“We are very comfortable with our insureds’ initiatives to generate their own green power,” says Paul Johnstone, the senior vice president of personal insurance at Chubb. “And we have no problem with our insureds entering into these types of lease agreements with companies like PURE Energies.”

If the aggregator has absolved the homeowner of risk, Johnstone says Chubb’s personal lines clients are not obligated to purchase any extension to their homeowner policy.

“If an insured enters into an agreement with a third party, it’s important to understand where obligations for insurance lie. We’ve partnered with a few insurance brokers and companies like PURE Energies to understand where obligations lie,” says Johnstone. “In Chubb’s opinion, in our interactions with [PURE Energies], currently their lease is providing coverage. Chubb is quite comfortable with that.”

Taylor at the IBAO says the industry as a whole has yet to come to such a bold and definitive conclusion.

“The aggregator is trying to take all risk and make it as easy as possible for the homeowners, which is admirable,” he says. “The difficulty for insurers is that they’re not convinced the aggregator has absolved the homeowner of all risk.”

The solar industry has been working hard to convince insurers of the benefits of supporting renewable energy production, citing precedents in other parts of the world. Elizabeth McDonald, president of the Canadian Solar Industries Association (CanSIA), notes that CanSIA is “trying to bring information forward to assist [the insurance industry] because we want to make sure our members can procure insurance and we’re putting [insurers] in touch with other jurisdictions, like Europe, where the industry is more established.”

Commercial Precedents
As the industry grapples with this new niche in personal lines, insurers need only look to commercial divisions to find precedents for functional, multi-party, business-to-business agreements where liability boundaries have been clearly drawn.

“One of our insureds has the largest fleet of green energy in Canada, effectively wind and hydro,” says Ron Schmid, an executive vice president at Jardine Lloyd Thompson (JLT) Canada in Calgary, and the head of the company’s national natural resources practice.

Traditional electrical-generating and energy companies balance out their portfolios with the addition of green electrical generation, says Schmid. And these big corporations have had no difficulties insuring operations and equipment on leased property where they have established wind farms or run-of-river hydro, while at the same time typically holding landowners harmless as a result of their operations.

“These are standardized contracts, in most cases,” says Schmid.

But some wonder if the insurance industry is moving too slowly to manage the sheer volume of multi-party arrangements sprouting up across Ontario.

“The FIT program in Ontario has spawned a tremendous amount of capital and private-sector infrastructure development in the province within a very short period of time,” says David Brosbell, a senior associate in the renewable energy sector of Purves Redmond Ltd. in Toronto. He points to billions of dollars worth of deals that have been made in anticipation of FIT between start-up engineering procurement and construction firms (EPCs), suppliers (such as solar manufacturers), and landowners. What they lack, argues Brosbell, is the third party, the investors who would become owners.

Conservative Canadian banks have been reluctant to invest in the surging renewable energy sector, while global investors like Morgan Stanley and Dundee Wealth are showing interest in backing solar and wind start-ups.

“But in order to secure financing, EPCs need to provide a guarantee to their lenders, to their investors, that the solar system or the wind turbines will perform as they say they will,” explains Brosbell. “The investors are looking to the EPCs to procure performance guarantee insurance.”

Some in the insurance industry have mixed views about the marketability of performance guarantee insurance, sometimes referred to as efficacy insurance. It’s primarily the larger global insurers and reinsurers who are positioned to take on this level of risk, and most business owners simply can’t afford it.

“You’re talking about significant premiums, sometimes in the seven digits,” says Schmid at JLT. “Typically, rather than transfer the risk to an underwriter, companies will simply absorb it as a business risk.”

Alternative Education
The renewable energy sector is growing, not just in Ontario, but across Canada. British Columbia is widely expected to introduce its version of the GEA this year. Governments in Alberta, Saskatchewan and Nova Scotia are keeping their eyes on developments in Ontario as they move forward with their own green agendas.

There’s no doubt that renewable energy will continue to spawn new and variable types of business arrangements as everyone sets out to get a piece of the utility pie.

“We expect to see consolidation in the market over the next year or so,” says Geoffrey Carter, technical director at RSA. “At this point, we don’t see any waning in the interest for solar projects in Ontario. Wind developments are also expected to continue, and we see offshore wind finally being developed here in Canada, as it already has in many other parts of the world.”

Brosbell at Purves Redmond Ltd., believes brokers can lead the way in growing insurance opportunities for this new market.

“This is an area where brokers have an opportunity to educate underwriters,” says Brosbell. “The first thing is to explain how the FIT program works, and what does this mean when the province is building a program of such magnitude. Because for the insurers, it’s not conventional, it’s variable, and many don’t understand the risks right now.”

As with any niche market, brokers who immerse themselves in the renewable energy sector will have a better understanding of the nuances in the market. Solar and wind technology is not new, so there may be renewable energy firms that are established, have ample experience and are looking to grow in the current environment. At the same time, there will be multiple, possibly higher-risk start-up firms. Carter at RSA recommends brokers know where their potential client fits within that risk portfolio.

“Brokers should seek to understand the prospective client’s business, their practices and their experience so that they can ‘sell’ the qualities of that company to their underwriters,” says Carter. “That is the best thing they can do to secure favourable terms.”

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