This case study outlines the application of the Physical Climate Risk Appraisal Methodology to assess a portfolio of operational ground-mounted solar assets across central and southern Europe, provided by Octopus Energy Generation and Howden.
In focus for this case study is a solar portfolio that comprises several operational ground mount solar projects in central and southern Europe, with capacities ranging from 5-12MW, and a total combined capacity of over 100MW.
The first project became operational in 2013 and the average remaining lifetime for the projects is 27 years. The fund acquired 100% interest in the portfolio when it was already operational.
Scoping and data gathering
The scoping process aligned with the fund’s strategy of maximising operational yield and long-term asset value. Preliminary climate risk assessment identified both acute and chronic risk exposure.
- Acute: severe convective storms (specifically hail and wind damage)
- Chronic: Heat-related risks driven by increased temperature (affecting asset operation, energy yield and asset structure cabling)
To streamline the data gathering process, Octopus Energy Generation concluded that a data tracker would be most useful, outlining priority data points, owners and source documents based on investment phase.
Materiality assessment
The materiality assessment was conducted at portfolio level, evaluating whether asset-level damage thresholds and projected financial impacts from physical climate risks could breach financial materiality thresholds when aggregated across the portfolio.
Using the EU Taxonomy, the investor considered 12 climate risks, with two deemed to be most material and assessed in detail within the case study: severe convective storm, with a focus on hail damage, and heat stress.
Cost drivers (sensitivities) were identified based on impact pathways. By running financial sensitivities, the investor tracked the transmission channels back through the fund structure and identified what level of impact becomes material to the investment for each hazard.
From the various projects in the solar portfolio, one specific site was selected to analyse for resilience building based on its location, relative size and track record of reliability.
Resilience building
Adaptation options were identified for hail and heat stress, considering the cost, benefit, and financial benefit to quantify. This included a PMMA polymer coating to enhance resistance to hail and an automated misting system to cool panels to mitigate heat stress.
Nature-based solutions were also considered, noting the dual benefit of enhancing natural systems while providing climate risk mitigation factors at financially viable costs.
The investor concluded that further consideration of market maturity conditions at a utility scale for solar panels is required. Such as large-scale projects, typically in the energy sector, designed to generate significant amounts of electricity (megawatts or gigawatts) for distribution to the wider electrical grid, serving entire communities or regions.
Value enhancement
This case study hopes to contribute to establishing a foundational framework for choosing resilience options based on the optimum threshold of residual risk transfer to insurance.
Presenting PCRAM results to an investment committee sparks a crucial conversation on how best to manage and share the risk and rewards of physical climate risks and resilience investment, which benefits investors, insurers and lenders.