By Gemma Claase ,
Growth Leader Renewables, Energy & Power Practice
02/12/2021 · 4 Min Read
The renewable energy industry is growing at a fast clip. According to the International Energy Agency, renewable energy capacity increased by 45% in 2020, led by a 90% growth in global wind capacity.
Declining costs for solar and wind projects, shifting regulatory frameworks that support decarbonisation, and evolving consumer attitudes all continue to contribute to increased renewable energy use. In fact, more than 80% of all new electricity capacity added in 2020 came from renewable sources.
But as investments increase and the industry matures, securing the right coverage for your entire portfolio of projects is becoming more challenging. Increased insurer scrutiny, combined with more competition among renewable energy companies, is making contractual risk management especially critical for a renewable energy project’s success.
Most renewable energy projects span several years, if not decades, and involve multiple contracts with disparate entities. Often, contracts with lenders include specific insurance requirements that can be impacted by shifts in the market.
Because contracts are generally finalised well before insurance coverage is required or work on a project commences, insurance conditions included in contracts are sometimes no longer commercially available.
At the same time, insurers are carefully examining the experience and reputation of individual contractors and reviewing all contracts related to a specific project, paying particular attention to:
Sophisticated renewable energy developers are benefitting by proactively engaging with insurance and risk management advisors throughout the contract cycle. Constant communication helps get a better understanding of whether insurance terms included in contracts are still commercially available and reasonable. Specialised risk and insurance advisors can conduct a thorough and detailed review of contracts and may identify potential hurdles related to insurance requirements and procurement further down the road.
“Engaging risk and insurance advisors early in the project lifecycle is critical to successful risk identification and mitigation”
Keeping costs within reasonable thresholds is another major concern. Insurance costs tend to make up a substantial portion of expenses, and costs tend to escalate when finalised contracts include specific insurance requirements that have become difficult to secure.
"Engaging a risk and insurance advisor prior to finalising contracts can help address profitability challenges by identifying any red flags that could lead to insurability challenges."
For example, asking for exceedingly high limits or requiring renewable energy companies to carry full replacement costs for catastrophe damages could create problems since coverage for these conditions is no longer commercially available.
To overcome these insurability difficulties, a broker can help develop standard terms and conditions within a registry of key terms and establish clear deductibles and limits. Ensuring all parties understand current requirements helps your broker effectively communicate with key insurers, promotes clarity in negotiations with underwriters, and supports a streamlined claims process.
Demonstrating diligence in managing contractual risk sends a message to suppliers, vendors, and contractors that your organisation has a sophisticated risk management strategy, which can contribute to better results for all parties. The market is already experiencing a level of consolidation, with lenders aggregating the more attractive assets.
As the renewable energy market continues to expand, and more players enter the field, companies with sophisticated risk mitigation strategies are more likely to succeed.
Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.