Solar Project Costs May Rise 20% in Six to Eight Months. Your EAR Sum Insured Was Fixed at the Old Price

Financial Express reported on 20 August 2026 that Indian solar project costs could climb by roughly 20 percent within six to eight months, as mandatory domestic sourcing requirements and a supply squeeze out of West Asia work through module and balance-of-system pricing. Every developer reading that line is recalculating capex, equity contribution and internal rate of return. Very few are recalculating their insurance.

They should be. The two covers that carry the largest single loss a solar developer will ever present, erection all risks and advance loss of profits, are both written on figures fixed at financial close. The EAR sum insured is the contract value of the works. The ALOP sum insured is the anticipated gross profit for the maximum indemnity period, taken off the same financial model. Neither figure moves on its own. If the cost of completing the project rises 20 percent, the policy is still standing behind the old number.

The tender pipeline makes this a portfolio question rather than a one-project question. NTPC Renewable Energy floated a tender for a 600 MW ISTS-connected wind project in Andhra Pradesh on 20 August 2026, and REMCL invited bids for 17 MW of solar plus 50 MWh of battery storage on 18 August 2026. Mercom reported on 12 August 2026 that storage-backed renewable tenders led procurement through the first half of 2026. KP Energy posted Q1 FY27 revenue of INR 521 crore, up 136 percent, on a renewable portfolio of 3.73 GW. There is a large volume of construction-phase risk sitting on the books of Indian insurers right now, priced and sum-insured on pre-escalation contract values.

The mechanism is the average clause, sometimes called the condition of average or pro-rata condition. It appears in essentially every Indian EAR and contractors all risks wording. Where the sum insured at the time of loss is less than the value of the property insured, the insured is treated as their own insurer for the difference and bears a rateable share of the loss.

The arithmetic is not complicated, which is precisely why it is worth writing out.

Take a project with an EAR sum insured of INR 500 crore, being the contract value at financial close. Costs escalate 20 percent, so the value of the works at the time of loss, on a reinstatement basis, is INR 600 crore. A storm damages a section of the module field and inverter stations, and the assessed loss is INR 30 crore.

1. Average ratio: 500 / 600 = 83.33 percent.
2. Loss after average: INR 30 crore x 83.33 percent = INR 25 crore.
3. Policy deductible, say INR 1 crore, is then applied: INR 24 crore payable.
4. Developer bears INR 6 crore on a loss they believed was fully insured.

The point is sharper on solar than on most construction risks because solar loss experience is dominated by partial losses: hail on module fields, windstorm on tracker rows, flooding of inverter and transformer skids, fire in a BESS enclosure. Every one of them gets scaled down by the same ratio.

Here is where most mid-term corrections go wrong. A broker notices the escalation and raises both sums insured by 20 percent, on the assumption that they move together. They do not.

The EAR sum insured is a replacement cost figure. It answers the question: what does it cost to rebuild the damaged works? A 20 percent rise in module and balance-of-system pricing feeds straight into it, because the reinstatement will be bought at the new prices.

The ALOP sum insured, following the loss of profits basis it inherits from business interruption cover, is a gross profit figure. It answers a different question: what revenue less specified working expenses would the project have earned during the period commercial operation was delayed by insured damage? That number is built from installed capacity, expected plant load factor, the tariff, and the standing charges the project keeps paying while it produces nothing, principally debt service, insurance, O&M retainers and land lease.

The consequence is uncomfortable. On a project whose PPA tariff was locked at bid, a 20 percent capex increase does not lift the revenue side of the ALOP calculation at all. Generation is unchanged, the tariff is unchanged, so gross profit per month of delay is unchanged. What does change is the standing-charge component, because a larger capex funded at the same gearing carries more debt service per month. The correct ALOP adjustment is therefore usually far smaller than 20 percent, and it comes off a revised financing plan rather than a revised bill of quantities.

Where the tariff was re-bid or a change-in-law claim under the PPA lifts the realised price, the ALOP sum insured does move on the revenue side, and the insurer will want the document trail. Delay in start-up cover for renewable and industrial projects sets out how the gross profit basis is built at inception.

The maximum indemnity period on an ALOP policy is chosen at financial close, typically six or twelve months on Indian solar, occasionally eighteen on projects with long-lead grid or transformer dependencies. It is the outer limit on how many months of delay the insurer will indemnify, and it is a hard cap. A sum insured that is adequate for twelve months does nothing for you in month thirteen.

Two features of the current escalation cycle push directly against that cap.

First, the ALOP indemnity is measured against the scheduled commercial operation date stated in the policy. The insurer pays the difference between the actual COD and the COD that would have been achieved but for the insured damage, capped at the maximum indemnity period. If the scheduled COD is now historic because domestic-sourcing lead times and West Asia shipping have already pushed the programme out, an insured event landing on top of that delay produces a messy adjustment. Delay from uninsured causes is not recoverable, and the adjuster has to separate the two on a critical-path basis.

Second, a tightening supply market is one where reinstatement takes longer. A six-month indemnity period assumes a damaged inverter station or a burned module block can be re-procured and re-installed inside six months. When domestic content requirements narrow the supplier list and imported balance-of-system is caught in a shipping squeeze, that assumption is doing more work than it used to.

Extending the maximum indemnity period mid-term is harder than raising a sum insured. It changes the insurer's maximum foreseeable loss and usually needs a reinsurance referral, since ALOP capacity on Indian renewables is largely reinsurance-supported. Ask for the extension early in construction, before the risk concentrates at the commissioning end.

There are four routes to closing the gap, and they are not interchangeable.

Escalation clause and its cap. An escalation clause raises the sum insured progressively through the policy period by an agreed percentage, most often 10 or 15 percent, with premium charged on half the escalation amount under the same convention used on fire policies. It is the cleanest instrument, and on a 20 percent move it is not enough on its own. A 10 percent escalation clause against a 20 percent cost rise still leaves roughly 8 percent underinsurance at the end of the period. The related treatment of how the escalation clause works on a fire policy applies directly, with the caveat that construction values ramp rather than sit flat, so escalation and value-at-risk interact.

Contract price adjustment endorsement. Where the EPC contract itself contains a price variation formula tied to input indices, an endorsement can align the sum insured to the contract's own adjusted price rather than to a flat percentage. This is the better fit when the escalation is contractual rather than estimated, because the insurer is following a number that is documented in the EPC agreement and evidenced by variation orders.

Mid-term increase in sum insured. A direct endorsement raising the sum insured, with additional premium charged pro rata for the unexpired policy period from the date of the endorsement. Two constraints matter. The increase is prospective, so it does not cure underinsurance on a loss that has already occurred. And the pro-rata basis on a construction risk is not always straightforward, because EAR premium is rated on the full contract value across the full construction period, so some insurers will charge on a time-on-risk basis and others on a full-period basis for the increment.

Increased cost of construction and additional-cost extensions. Extensions covering escalation in reinstatement cost after a loss, expediting expenses and air freight are separate sub-limits. They help with the cost of putting a loss right in a rising market, but they do not fix a deficient primary sum insured, and average is applied before those sub-limits do any work.

An underwriter agreeing a 20 percent increase in exposure mid-term is being asked to accept more risk on a project that has already been running, without repricing from scratch. They will want the revised contract value evidenced rather than asserted. Expect to produce:

• The revised EPC contract value, or the signed variation orders and price adjustment certificates that take the original contract to the new figure.
• The board-approved revised project cost and the updated cost-to-complete statement.
• The lender's independent engineer report confirming the revised cost and physical progress, which most project-finance structures produce quarterly anyway.
• The updated drawdown and disbursement schedule, since the insurer's value at risk profile through the remaining construction period follows it.
• Procurement evidence for the changed supply base, including revised module and inverter purchase orders. Where domestic sourcing has changed the manufacturer, the underwriter will look at warranty backing, factory quality history and the defects exclusion clause level applicable to the new equipment.

That last point is easy to miss. A cost increase driven by a mandated change in sourcing is also a change in the physical risk: different manufacturers, different cell technology, different transport routes, different installation crews, all behind one headline number. The disclosure duty under the policy runs to the risk, not just the value.

Indian EAR wordings carry an alteration of risk condition to this effect: where the risk is materially altered during the currency of the policy, the insured must give immediate notice to the insurer, and the insurer may then adjust the terms or the premium. Silence on a revised sourcing plan is a defensible reason for an insurer to resist a claim later.

On a project-financed solar asset, the insurance requirement is not really set by the developer. It is set by the insurance schedule to the common loan agreement, which typically obliges the borrower to maintain EAR cover for not less than the full contract value of the works and ALOP for not less than an agreed number of months of debt service, with the lenders named as loss payee and an insurance certificate delivered annually.

Three things break when project cost moves 20 percent after financial close.

1. The requirement is fixed at the old number. Many loan agreements state the minimum sum insured as an absolute figure from the base case model, not as a formula. Holding exactly that figure keeps the borrower covenant-compliant while leaving the asset roughly 17 percent underinsured on an average calculation.
2. Overrun funding decides who is exposed. Overruns are normally funded by sponsor equity or a contingent equity undertaking, so the incremental capex sitting outside the sum insured is sponsor money and the sponsor wears the average deduction.
3. A mid-term change needs the lender in the room. Raising the sum insured changes the premium and the construction budget, which may require lender consent. The reissued certificate of insurance and the endorsed loss payee clause both have to reach the lender's agent.

The six-to-eight month horizon in the Financial Express report maps onto a construction season. A project mid-erection today will pass through the escalation and through a weather window on the same timeline.

A practical sequence:

1. Establish the current value at risk. Not the contract value at financial close and not the drawn amount, but the reinstatement cost today of everything erected plus everything on site, including free-issue material.
2. Test the average exposure on a partial loss. Model a 5 percent and a 15 percent damage scenario. That is what actually happens, and it is what makes the shortfall real to a finance director.
3. Separate the EAR correction from the ALOP correction. Recalculate the ALOP figure from generation, tariff and revised debt service.
4. Test the indemnity period against current reinstatement lead times. If a replacement inverter station is now a nine-month order, a six-month maximum indemnity period only covers part of the delay.
5. Fix the loan agreement wording at the same time, so the next cost move does not require the same exercise.

Brokers holding a book of construction-phase renewables should run this across the portfolio rather than project by project, because the escalation is a market event. The review sits alongside the questions raised by co-located solar and BESS tenders and by the phase structure of erection all risks and ALOP on infrastructure builds. Sum insured adequacy is the dullest item on any of those agendas and the one that decides the size of the cheque.