At the tail end of 2013, the full force of Mother Nature’s un-paralleled ferocity was felt across the UK. Trees were toppled, power lines were snapped like twigs and for the most of us, and our daily commutes were undoubtedly disrupted. As the country rebuilds and life continues Jude’s legacy remains. Can the impact of nature’s wrath be harnessed to meet our every increasing energy demands? Will the Insurance market have the appetite for the growing Renewable Sector?

In recent news the Government intends to cut subsidies for onshore wind and solar power, while increasing financial support for offshore wind. It believes the changes won’t hurt its plans to expand renewables in general – and the industry appears to agree. With this boost in offshore subsidies, the onshore subsidies have been scaled back. It is unlikely that this will affect the larger scale onshore projects but more than likely see the smaller community led schemes scrapped.

The UK needs to double the current amount of electricity it generates from renewable energy if it wants to meet its targets for 2020. Between April and June this year, green energy sources accounted for around 15.5 per cent of electricity but this needs to increase to 30 per cent in the next six years. The government claims it is making “very good progress”, with £31bn worth of private sector investment in renewable electricity announced since 2010 and hopes that green energy will play an important part in keeping UK lights on. Wind power accounts for 7.5 per cent of electricity generation in the UK, according to the latest government statistics. RenewableUK have said there are currently more than 5,100 operational turbines in the UK alone. The government wants to increase offshore wind capacity from around 3.7GW to 16GW, and onshore wind capacity from 6.7GW to 13GW by 2020. China, the US and Germany have the largest capacity for wind power, with the UK coming sixth on the list. Around 960 turbines are currently being built in the UK, with 2,711 turbines approved for construction.

Round 3 in the UK development of offshore wind will surpass all previous efforts in terms of the size and magnitude, distance from shore, capital costs, new cutting edge technology and installation techniques. The biggest hurdles affecting the offshore renewables market today remain unchanged, financing, subsidies, technology and supply chain.
As we move further offshore the need for High Voltage Direct Current (HVDC) links will become more pressing, currently there are only three suppliers in the market who manufacture the converter stations required to transmit the power generated back to shore. Given this supply constraint, the lead time for a converter station is between 30 to 50 months.

On the cabling front there are few suppliers of HVDC cables and no doubt delays will occur with long lead times. The lack of suitable installation vessels will also need to be addressed, with a limited number of vessels capable of lifting the 10,000 ton converter stations into position.

There have been a large number of new turbine suppliers enter the Renewable industry in the last couple of years, especially from the emerging markets. The long term reliability and quality assurance of these units is unproven. The clear benefit will be increased competition and therefore more competitive margins for wind farm developers, however there is expected to be a production overcapacity in the supply of wind turbine generators in the years to come. With the current surge in new turbines, no doubt obsolete end of line units will flood the market along with a myriad of spares, it remains to be seen how the issue of extended warranties on existing wind farms will be handled or whether operators will look to transfer these risks to Insurers?

The offshore development of a wind farm takes on average between 7 – 10 years. The initial planning stages including, identifying a suitable area, evaluating the wind potential and ground conditions take on average 1 to 3 years. Applications are then sent to the relevant public authorities who in turn conduct the required environmental impact studies which can take a further 4 years to complete. The EPC contractors are then chosen, terms are negotiated between the various supplies and the installation and logistics are planned, this process can take up to 3 years to complete. The final stage before the commencement of construction involves securing all of the financing, preparing the financial model for investors and banks and securing the large capital investment required to begin installation and construction. Depending on the availability of this capital, which is affected by the government’s green policies, the process can take between 1- 3 years to complete.

Loss adjusters are involved in a project at an early stage, our experience in dealing with the complex claims and understanding the risks involved can help refine Capex models and stress test policies and contracts before the first foundations are laid. We are heavily involved in the installation and construction phases which can take up to 2 years to complete, we hold regular progress meetings with the project team and monitor the project progress dealing with potential claims under the Construction All Risks policy.

Upon completion the project will then transfer to the operational phase, and the corresponding team will look after the day to day running of the wind farm and take care of the operations and maintenance for the 20+year lifetime of the project. As loss adjusters we have the benefit of dealing with the installation and construction phases and have already obtained in depth knowledge of the project, which helps when dealing with potential operational insurance related incidents under the Operational All Risks policy (OAR).

The prime offshore real estate for development has already been carved out by the Crown Estate, with the major renewable energy players lined up for development. Historically investors have been nervous about the future of offshore wind, but hopefully, with this recent announcement from the UK government, more and more projects will come online in 2014. With the Round 1 and Round 2 sites already in operation the early movers in the Insurance market have met the challenges faced by this developing industry tailoring wordings and evolving with the developments in the technology.
Clear Market Leaders have come to the forefront with strong ties to the industry and an in-depth understanding of the risks involved. No doubt as supply and demand dictates, Insurers will rise to meet the flurry of new projects in the pipeline. More capacity is being pledged by a greater number of Underwriters keen to be involved in this new line of business.

On the claims side we have noticed a change in the more recent losses. Since many projects are now out of their main construction phases in the UK and across Europe, we are seeing a transition into operational and maintenance claims, however cabling issues are still apparent in the industry as a whole.

The graph above shows 40% of offshore wind losses are attributable to cable related damages, which equates to 83% of the claim costs

We have witnessed an increased emphasis on the role of the marine warranty surveyor, experts in various aspects of offshore construction which should stem the losses concerning cable installation. The Insurance Market has responded by producing a clear list of preferred cable installation specialists, with a good track record for cable installation and repairs. There is a greater requirement from the developers and their lenders to purchase more complete levels of cover, including business interruption / delay in start-up, bringing a more balanced insurance product to the market.

We have also noticed an increase in claims involving extended warranty cover and contingent business interruption in the recent months. The number of companies’ seeking comprehensive insurance cover has also increased with the growth of the Offshore Transmission Owners (OFTO) taking on the extensive array of export links that connect the wind farms back to the grid. Access to adequate insurance cover has been identified as one of the key market challenges for the renewable energy sector.

For insurers, this is a great new business segment, but one where understanding the exposures creates a whole new set of challenges. As has happened with so many other types of technology, what is now cutting edge will one day become relatively mainstream but we are still in the development stages with diverse designs and many prototypes. For Insurers to operate a successful business model in Renewables industry a thorough understanding of the technology and associated risks is vital.

An article by Matthew Yau, 16 January 2014