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Insuring a renewable future

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As the clean energy industry forges ahead into new markets, sometimes with technologies yet to stand the test of time, conditions for obtaining insurance for renewable energy facilities have tightened significantly, particularly for the increasing number of projects built in areas susceptible to natural disasters

Gone are the days when insurance companies were scrambling to out-compete one another to secure business in the renewable energy sector, offering favourable terms in a race to meet premium income targets. Companies like CNA Hardy and Pioneer have stopped underwriting renewable energy business and others have scaled back. Large claims, particularly during the construction of offshore wind farms, led to losses for insurers, who are taking steps to get back onto profitable ground.

“Clients and brokers had a very favourable situation in which underwriters accepted things that, in hindsight, we can see were not sustainable,” says Jonas Dalsgaard at Codan, one of the main insurers in the wind power sector. “We were already seeing signs of a harder market and then Covid put its foot down.”

Market capacity for insurance has become more restricted in the tougher financial times ushered in with the pandemic. Insurers are also more cautious due to concerns about a lack of access to project construction sites and operational facilities in need of maintenance during social lockdowns to suppress the spread of the virus. Related supply chain shortages also have to be taken into account. Reinsurance costs are generally rising and inevitably will have to be accounted for in the cost of building and operating renewable energy projects, states Dalsgaard. He expects more stringent insurance conditions are here to stay for at least 18 months.

PUSH BACK

Hanne Aaboe, senior director for insurance at Ørsted, a developer of offshore wind projects, says the hardening of the insurance market is justified in part, given a large number of claims insurers have had to pay out for offshore failures. She adds, however, that some insurers are taking advantage of the situation, even if they have not had losses. “We do have some sympathy that rates will go up, but to a reasonable level.”

Higher premiums can have a significant impact on the business case of projects, says Aaboe. “Basically, the most important thing for a renewables company is to lower the total cost of energy and in some cases we have seen an almost doubling in premiums.”

Insurance forms a greater part of the total project Capex in newer markets, so increasing premiums in these locations would have a significant impact on overall costs.

In a softer market, it was possible to spend as little as 0.4-0.6% of capital expenditures for insurance on an offshore wind farm. But for certain offshore wind projects in Asia, insurers are now quoting rates of 2% or more of Capex. “This is a big deal as the Capex can be billions of euros,” says Aaboe.

Ørsted is pushing back against insurance conditions it considers unreasonable—including some of the covid-19 exclusions that are routinely popping up on renewable energy insurance—and has also begun considering alternatives to the commercial insurance market, including turning to its captive insurance unit and tapping into the mutual insurance market for coverage. “We don’t want to end up in a situation where insurance prevents a project from getting done.”

 

SERIAL DEFECTS

While there are no reports yet that insurance issues are preventing renewable projects from being built, getting a good deal on insurance has become challenging. One area in which the changed backdrop for insurance is evident is clauses for serial defects, which can come into play when a number of wind turbines or solar panels break down for the same reason. Typically, an initial loss would be fully covered, with a declining level of compensation for subsequent losses.

“In the soft market, it was common to see sliding scale multipliers being applied for up to 12 or perhaps 15 losses where some insurers had close relationships with the original equipment manufacturers resulting in increased comfort, or oversight of the quality of the manufacturing process,” states Willis Towers Watson, an insurance broker and risk advisor, in its 2020 renewable energy market review. In a hardening insurance market, insurers are working to avoid open-ended terms and conditions, the company states, limiting the number of serial claims or percentage of losses for which they will take responsibility under an insurance policy.

 

Renewable energy is a growth industry—all the oil majors are also set to invest massively—and there will be lots of business for insurers”

 

SHIFTING THE RISK

Codan’s Dalsgaard notes that insurance capacity is particularly tight in markets where the risk of natural disasters is higher. In Asia “quite harsh” limits are being applied for natural calamities like typhoons and earthquakes.

With insurers becoming wary of providing coverage for natural catastrophes, particularly for Asian offshore wind projects, Barbara Zuiderwijk, of renewable energy advisory Green Giraffe, says brokers have had to be creative in finding solutions to make banks and investors comfortable with risks, such as complementing insurance with financial hedging instruments or dealing with risks in the structuring of finance.

Elsewhere, as European offshore wind farms increasingly go without the support of subsidies, it is the project sponsors that are willingly accepting higher deductibles and caps in order to get cheaper insurance. Their aim is to “optimise everything” on a project, explains Zuiderwijk, including insurance. The change has come as developers and owners gain comfort with managing the risks of offshore wind. “In the beginning, people insured everything they could,” she says. “Now there is a move to [focus] on the risks you cannot handle yourself and insure those.”

 

UNHEALTHY SPEED

But Dalsgaard warns against cutting “unhealthy corners” in the push to bring down capital and operating expenses. The rapid-fire pace of technological change, a constant push for bigger wind turbines and the use of large-scale prototypical components on those turbines is a bad match for insurers’ needs for conformity and proven technologies. In a market that has changed dramatically, Codan’s ability to offer cheap prices is restricted, he says.

Insuring technology new to the market in wind, tidal and wave, concentrated solar power (CSP) and other renewable energy sources is not the only concern for insurers. Renewable energy projects in new and developing markets may also suffer from concerns about the inexperience of contractors and a lack of confidence in the local supply chain.

Yet while conditions for insuring projects may get tougher before they get easier, Zuiderwijk says the market will correct itself over time. “More companies will enter the market because it is becoming more profitable due to rising insurance premiums and certain risks just will not be insured anymore because people are more comfortable with them.”

Aaboe believes the harder insurance market is here to stay in the coming year but expects the situation will normalise after that. “Renewable energy is a growth industry—all the oil majors are also set to invest massively—and there will be lots of business for insurers.”

 

TEXT Heather O’Brian


Read more in-depth articles and expert opinion pieces on the global transition to a becarbonised energy economy on FORESIGHT Climate & Energy

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