The challenge of managing the risk
Recognising, defining and dealing with renewable energy risks have never been more of a priority. Projects tend to be complex, innovative and often pioneering, which is why it pays to have insurance in place.
The EU’s binding target to source 20% of the Continent’s energy needs from renewables by 2020 has played a major role in elevating the importance of renewable energy development. National Action Plans (NAPs) based on these targets were defined across electricity, heating and cooling, as well as transport.
The remaining time for governments to comply with these target requirements is now relatively short. Producers, entrepreneurs, financiers and operators across the entire renewable energy sector therefore need to ensure they can deliver projects successfully.
The pivotal role of insurance
Risk identification, management and transfer are crucial components for project success in the increasingly target‐driven renewable energy landscape. However, all too often these essential elements are not considered early enough in the project. Indeed, failure to appropriately manage, control and transfer risk is one of the factors most likely to jeopardise a renewable energy business ‐ whether at the financing, construction, handover or operational stage. Working through potential risks with expert partners, right from the outset, will make a major difference to the smooth running and outcome of a project.
Yet finding appropriate and quality insurance coverage is not always easy for project owners and operators because experienced underwriters may not be sufficiently satisfied with the risk profile of the operation. Many entrepreneurs and operators have yet to realise the full extent of the complexity of the risk factors actually faced, or the assurances that professional insurers will seek in order to provide cover at viable rates. Prototype technologies may be involved, which are notoriously difficult to assess and insure. In addition, across all new renewable technologies, industry standards and best practices relating to construction, operation, safety and risk, have yet to evolve and be formalised. This makes risk benchmarking difficult. Project owners frequently leave it late to engage in dialogue with insurers, meaning they are missing out on valuable input that could well make or break a project later on and, ultimately impact on the future success of their business.
Expertise, strength and service
Insurance buyers in this forward‐looking industry need assurances that a potential insurer has both sector expertise and balance sheet strength. The importance of informed and disciplined underwriting and claims management cannot be over emphasised, especially in recessionary times.
The purpose of insurance is to deliver financial compensation in the event of the sudden, accidental or unforeseen. In addition, leading insurance companies and the reinsurers that back them are averse to speculative risk, and not willing to engage in unrealistic underwriting that would damage their own bottom line or ability to honour future claims.
Assessing true exposure is therefore a key component to securely underwriting new or innovative projects in renewable energy – both at the construction and the operational stage.
Renewable and alternate energy
Renewable energy technologies are now increasingly being exploited – include wind, solar and photovoltaic, hydroelectric, geothermal, and biomass products (wood, waste), all of which pose different environmental and technological challenges.
New energy technologies also present often unique challenges from an insurance perspective. Operations can range from relatively modest and straightforward petrochemical, bioethanol or biodiesel plants, to massive, high-investment-value facilities converting waste-to-energy. Whether at the planning, building or operating stage, renewable energy projects must frequently deliver for a highly diverse group of stakeholders: financiers, governments, the EU, planning authorities, and the tax payer to name but a few.
Furthermore, ‘green’ power, like any other traditional energy industry, has the potential to turn ‘black’ overnight as a result of environmental pollution or disasters, the negative attention of environmental pressure or NIMBYism (Not In My Back Yard). The stakes for corporate reputation in this sector can therefore be extremely high.
Some renewable energy technologies have been operating for a number of years and have already experienced insurance loss scenarios. This provides operators and insurers with actuarial statistics and useful learning about foreseeable and previously less known vulnerabilities. Although people tend to think of these technologies as ‘new’, in actual fact many of them are not. However, the industrial scale on which they are now being constructed and operated, as well as their application in novel ways or new environments, is at the root of the many new risk issues now emerging.
For the general public, on- and off‐shore wind turbines are one of the most well known and readily identifiable sources of renewable energy production. The longstanding simplicity of the windmill concept belies the complexity of what can go wrong with today’s multi-megawatt producing turbines.
Most risk assessments will focus on the major mechanics and standard elements of the wind production process (e.g. gearbox failure, cable damage, nacelle or transformers), but operators ignore at their peril the potential risk to their business of damage to less obvious areas (e.g. foundations, landslip, cable damage) or the risks the weather can pose to such prominent structures (e.g. lightening, ice).
Any of these factors can halt production, and the time to repair, re-source or replace damaged components, which will often be huge and bespoke can have a devastating impact on the ability to maintain output.
There are many solar technologies in use today, including concentrating solar thermal power (CSP), solar power tower, parabolic trough, and Fresnel lens, all of which present risk issues for businesses.
For example, environmental factors can affect surrounding and supporting structures, just as much as the damage that can be done to the actual technology. The risks particular to solar technologies include the high combustibility of Organic Rankine Cycle (ORC) / Heat Transfer Fluid (HTF), the vulnerability of salt bath heat stores, and problems of reflector alignment.
Production of biodiesel involves the use of flammable alcohols (methanol or ethanol), while the end product is also combustible. Although production plants tend to be small, the cost of systems to mitigate the significant risk of fire, are often perceived to be disproportionate to the plant costs, something which can pose a problem to the operator and insurer alike.
Though long established as a method of power generation (i.e. dams and turbines), hydro energy has recently been undergoing interesting developments, especially in new areas such as tidal and wave. The sometimes novel designs and extreme locations mean that very often, there can be problems with access, which results in new and challenging risk concerns alongside the more traditional areas of machinery breakdown involving often large and bespoke components. Insurers will therefore need assurances of the planning required to manage these additional challenges.
Technology integrity and verification
Because of the diversity of renewable energy projects and operations, and the fact that many are new and often still evolving, insurers will want to assess plans and operations comprehensively. They will look for the integrity of a technology, and management expertise – whether innovative or established. For example, can the technology be verified in relation to existing technologies? And if it is prototypical, they will look for points of comparison with existing and proven technologies, and then attempt to assess how far it differs. They will also want to focus on all environmental and structural aspects common to traditional industrial or power generation plants before providing cover.
The following provides an overview of some of the risk factors an owner or operator needs to be aware of, plan for and document in order to provide the appropriate answers required by a prospective insurer:
• Standards and Guidelines – Few official standards or best practices exist for many renewable processes. However, insurers will look for compliance with those that do.
• Status of warranties and Liquidated Damages – Insurance policies will change when warranties expire, meaning the plant will become more expensive to insure. Limitations on warranties can also give a false sense of security. A warranty will cover breakdown in machinery, but it will not cover other losses in production (e.g. business interruption, consequential loss), the sum of which can amount to more than the value of the broken part itself. Thus it is important to arrange additional cover for all such eventualities.
• Protection of Assets – From the very outset of a project, insurers will require evidence that full risk management vigilance has been undertaken to protect assets against insurable perils.
• Power Grid/Reticulation and Grid Connections – Focus on the core activity of a renewable energy production plant must not neglect the protection of all supporting structures and technologies. Cabling in particular, requires its own protection strategy because damage to it will jeopardise normal operations and output. In the case of one transformer fed by many wind turbines for example, the impact of its failure can be totally devastating.
• Contingency Planning – Well run businesses of all kinds need a contingency or crisis plan to be able to respond effectively to any unforeseen events that might halt operations.
• Maintainability – Insurers will want to see regular monitoring and inspection of facilities, and that servicing reports and repair documentation is thorough and up to date.
• Natural Elements – Renewable energy production facilities can be particularly vulnerable to extremes of weather (wind speed, snow/ice, flood etc.), and those that use the weather to operate are especially at risk. Understanding exactly how your plant could be affected by extreme weather conditions will enable better construction of the plant from the outset.
• Claims, communication and partnership – Owners and operators of renewable and alternate energy projects need to seek assurance that all potential threats have been considered and planned for (e.g. comprehensive transport, construction, liabilities to people, staff and the environment, fire, business interruption etc.) because any one aspect can potentially jeopardise a whole operation.
With the right partner and expertise in place, it is possible to obtain comprehensive risk management and seamless risk transfer, which can be highly effective in supporting the successful rollout and handover to the operational phase of a project, or for supporting long term production continuity.
Complex businesses, especially those that break new ground, operate best when there is transparent and frequent communication between insurers, their engineers, and intermediaries such as brokers and client organisations. The earlier insurers become a true ‘partner’ in a renewable energy project, the more value they will be able to deliver over the long term.