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RENEWABLE ENERGY INSURANCE: Renewed efforts
Written by David Adams
Global renewable energy capacity grew at record rates in 2016, with investments in solar greater than investment in any other electricity producing technology during that year. David Adams looks at how the insurance market is responding
Despite attempts made by some – including the current US President – to turn back the clock, renewable energy is booming. Global renewable energy capacity grew by 161 Gigawatts (GW) in 2016, a record annual increase, according to energy policy network REN21. Around half this new capacity came from solar power, which means that investments in this form of renewable energy were greater than investment in any other electricity producing technology made during 2016.
New renewables capacity installed across the globe in 2016 cost US$242 billion, 23 per cent less than was invested in new renewable capacity during 2015; the cost of building and operating solar and wind energy installations has fallen significantly. In the UK, in June 2017, the National Grid announced that a new record for renewables generation meant that for the first time a combination of solar, wind, biomass and hydropower sources had made a greater contribution to electricity generation (50.7 per cent) than fossil fuels.
Still, it is important to keep these figures in context. Renewables contributed ten per cent of global energy generation in 2016, still far behind the 80 per cent generated using fossil fuels. Although they contributed almost a quarter (24 per cent) of global electricity generation in 2016, most of this was produced by hydropower. Wind generated four per cent and solar 1.5 per cent.
Yet the clear upward trend in the use of renewables and the fall in costs have both been very clear during recent years. So how have insurers responded to the expansion of the renewable energy industry, to cover risks around renewables, from microgeneration to large-scale projects?
Murray Haynes is a partner and a renewable energy risk specialist at Alesco, which arranges multi-line insurance and reinsurance for businesses during construction and operation of renewable energy projects and facilities. He says the core insurance products used to insure renewables are those you would expect to use to insure any construction project or operational facility. For example, during the construction phase there is a need for marine cargo cover, various covers for damage due to natural causes; and delay in start-up insurance, to cover income loss caused by delayed project completion.
During the operational phase there would then be a requirement for insurance to cover operational risks, related to damage to property in particular; and business interruption insurance to cover fixed costs during major disruption. Other covers that might be more or less relevant depending on the location of a project could address risks such as terrorism, sabotage and industrial action.
Cover against other political risks may also be necessary, in case such eventualities as a changing tariff rates or outbreaks of civil unrest that might prevent access to facilities. It is also not unheard of for a government to seize assets, or to stop businesses using foreign exchange to take money out of the country. None of these issues are unique to renewable energy facilities, of course; more specific risks include those related to offshore projects (the vast majority of renewable projects are onshore).Premiums for offshore projects can be up to five times more expensive than equivalent projects or operations on land, in part simply because of practicalities. If an offshore wind turbine becomes badly damaged, for example, it may be necessary to recover hardware from the seabed, which can be a very expensive undertaking.
Renewable insurance needs can vary significantly. Consider, for instance, the physical conditions that might affect wind turbines in northern Scandinavia, where a build-up of ice on turbines can disrupt operations and/or create additional risks to people or property nearby; or the risks facing facilities in areas prone to extreme weather or earthquakes. Such natural catastrophe perils “weigh quite heavily on underwriters’ minds”, according to Haynes.
But insurers have also written policies to address more specific requirements around scale or technology. The range of renewables-related products now offered by the broker Lycetts, for example, includes cover for landowners investing in anaerobic digestion technology for waste management and fuel production; insurance for biomass and geothermal generation; and policies tailored for microhydro electricity generation schemes; alongside insurance for solar and wind energy generation projects.
Specialist broker Nviro has also developed policies covering the lesser-known forms of renewables for projects of varying sizes. Its hydro power insurance solutions may suit small projects including community generation initiatives and watermill renovations. The company also offers insurance for newer renewable technologies including tidal and wave energy; desalination and osmosis energy generation technologies; kinetic energy generation; fuel cells; and carbon capture and storage.
XL Catlin, meanwhile, is leading the insurance programme for the ITER experimental fusion project, a scientific venture seeking to demonstrate the technical feasibility of using nuclear fusion to develop a limitless source of energy. The organisation is currently building a magnetic structure to control and confine fusion processes taking place within plasma heated to 150 million degrees centigrade.
For most renewables-based projects, however, the reality of insurance is a little more traditional. One final group of risks to highlight is those related to ‘series losses’, where design or manufacturing defects, or a widely used installation method may result in the same claim being made for many multiples of the same piece of equipment. To counter this, underwriters may insert a series losses clause to limit the number of times they will pay out on claims with an identical cause.
Haynes does not feel there are any particularly striking trends in claims related to renewables at present – many claims are technology-specific, others relate to more generic risks, such as accidental damage of assets in transit or during construction.
But he does pick out one trend: losses related to cabling used for offshore wind facilities. Cable losses are thought to account for about half of all losses related to offshore wind projects. These problems may include damage to cables that occurs during their manufacture, or in transit – or by the installer, such as over-twisting of cabling. Cables can also easily be damaged during the process of laying them on the sea bed: laying one cable may dislodge and damage another, for example. Sometimes the sea bed erodes under cabling, leaving lengths of cable hanging between rocks, which can also cause damage.
Repairing these cables can be very expensive: the cost of chartering a specialist vessel for several weeks can be extremely high. But it may also be unavoidable, particularly if it is the large export cables, which carry energy back to the shore, that are damaged.
But even those businesses that need to sacrifice more of the potential returns on renewables investments on insurance at least have the consolation that now is a good time to be buying these policies. “There’s a lot of capacity in the market at the moment,” Haynes points out. “Underwriters have a commercial imperative to be competitive.”
This article was published in the July 2017 issue of CIR Magazine.
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