Parametric Insurance for Renewable Electric Power Producers in Central America
Hydro, wind, and solar power are variable renewable energy (VRE) resources with normal daily and/or seasonal fluctuations that are taken into in financial planning for these investments. These energy resources complement each other because they have different intermittency patterns and the impacts on the power grid are also offset by other electricity sources and energy storage.
However, VRE generation can also be substantially reduced by major droughts, floods, or prolonged periods of insufficient wind or solar resources. Parametric insurance reduces the financial risks to large, utility-scale VRE investments from extreme weather or climate events that have a major impact on resource availability for power generation. It does not cover the cost of physical damage to infrastructure or equipment.
Parametric insurance pays policyholders fixed amounts set in the policy when insufficient or excessive resource flows reach predefined thresholds. Unlike damage-based insurance, parametric insurance does not require a costly, slow, and conflict-prone adjustment process to determine payouts. Since the payout triggers are based on readily available hydrometeorological data from independent sources, policy holders can obtain payouts relatively quickly. This coverage reduces the risk of cash flow problems from potential revenue losses and contract penalties. Parametric insurance can make it easier to obtain financing and manage utility-scale VRE operations by reducing risks.
The USAID-funded Climate Economic Analysis for Development, Investment, and Resilience (CEADIR) Activity assessed opportunities for domestic insurance companies and international reinsurance companies to offer parametric insurance for utility-scale VRE in Central America.