This article first appeared in The Edge Malaysia Weekly on March 17, 2025 - March 23, 2025

Malaysia’s target of achieving 70% renewable energy capacity by 2050 has created significant business opportunities for solar farm operators. However, climate change-induced weather fluctuations pose a financial risk to investors in the solar energy sector.

To mitigate this risk, Etiqa Malaysia introduced the Solar Energy Shortfall Takaful (SEST) last year, building on demand for its Solar Energy Shortfall Insurance (SESI) launched in 2023. SEST, which the insurer says is the first of its kind in the country, is designed to protect businesses against risks associated with fluctuations in solar energy output.

Simply put, the insurance provides financial coverage to solar farm owners against revenue losses caused by shortfalls in solar energy production due to reduced solar irradiation.

Solar energy production is dependent on solar irradiation levels. Any unexpected decrease directly affects energy generation, leading to financial losses. SESI and SEST are designed to cover these losses, with calculations based on input (solar irradiation) and output (energy generated). However, it excludes factors unrelated to solar irradiation, such as operational and maintenance issues.

In an interview with ESG, Etiqa General Takaful Bhd CEO Shahrul Azuan Mohamed says SESI and SEST function as parametric coverage, meaning they do not involve physical losses but instead provide financial compensation based on predefined parameters, such as solar irradiation levels.

“For example, before one can claim for a consequential loss by a fire, there must be a fire that causes business interruption so that the fire policy is triggered. Traditional material damage-based insurance or takaful products cannot address this protection need because the drop of solar irradiation does not cause material damage,” he says.

“With this, there is no fire or any other catastrophic event, like a hurricane or windstorm, to claim against, but it does rely on satellite data to quantify the expected solar radiation a solar farm can expect.”

The National Aeronautics and Space Administration (Nasa) provides data on solar irradiance, the measurement of the Sun’s energy reaching the top of Earth’s atmosphere at a mean distance at one moment in time.

The data is accessible to anyone with an Earthdata Login, says Shahrul, adding that the insurer uses this data to determine whether a climate event would cause a solar energy shortfall and subsequently trigger the SESI and SEST. A solar farm operator would do the same as well before setting up the farm to determine the best possible business outcome and to obtain financing.

“A solar power producer will typically visit the farm’s site to see whether it will receive enough sunlight and solar radiation for the solar panels to generate electricity. The size of the farm is also determined based on what is viable for the business,” he says.

“This data is also shared with the bank, which will then evaluate and determine how much credit can be disbursed to the project owner. The required bank tenor for a PV [photovoltaic] solar energy project is normally five to 10 years and, therefore, protection measures to ensure stable electricity production to generate sufficient revenue to honour the financing obligation are in demand.”

Etiqa worked with its reinsurance partner Swiss RE to offer this product, not just to protect solar farm operators from business loss but also to encourage the proliferation of solar farms in Malaysia.

Similar insurance product concepts have been developed and sold in the US, Europe and markets in Asia-Pacific that have substantial growth in solar energy, such as Australia, China, Japan and, recently, Vietnam.

The SESI and SEST are issued on an annual basis and the energy shortfall is calculated based on output or energy generated over 12 months. The policy’s premiums and its underwriting are subject to various factors, such as the size of the farm and the threshold of coverage.

For example, if a solar farm producer chooses to insure output shortfalls that are below 60%, its premium will be lower than another that insures shortfalls below 90%. “If the threshold a client chooses is at 60% to 90% efficiency and, at the end of the year, because of the weather, the average is 55%, the 5% difference is what we pay,” Shahrul explains, adding that the common range threshold that clients insure is within 60% to 90%.

“There are days when the output is at 100% and there are days when it drops to 40% because of rain and floods. But when it is averaged out over the whole year, the power producers’ risks are mitigated and it makes more sense to calculate the consequential loss that way to adequately determine their business losses.”

Currently, SESI has five clients, but the total addressable market includes about 80 players across the renewable energy ecosystem, including installers, manufacturers and service providers, according to Shahrul. He expects more players to enter the market, particularly as demand for clean energy rises with the expansion of data centres in the country.

“These insurance policies not only mitigate the risks associated with solar irradiation volatility but also enhance the bankability of solar projects, encouraging more investments in clean energy,” says Shahrul.

The challenge now lies in encouraging solar farm operators to consider insurance as an integral part of their business planning from the outset, rather than treating it as a secondary concern.

“Insurance has always been the last on people’s minds compared to more developed countries. Many smaller companies see insurance as optional,” he says.

“But solar farms are a big investment and the assets are expensive. Insurance is important so that they can sleep well at night, knowing their business risk is mitigated and, in this case, transferred to us, the insurance company.”

The company’s underwriters are currently looking at the small and medium enterprise business landscape and how they can be empowered through solar energy before it is brought to the residential level.

“Office buildings also use solar energy, and their electricity bills are in the tens of thousands of ringgit. With more data that comes from these buildings and as technological innovation advances, there is a possibility for us to scale down the coverage for the people, not just for solar producers,” he says.

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