Skip to main content

Blog

Renewable energy: The latest challenges facing onshore wind projects and how risks can be managed

Increased costs and supply chain disruption, are some of the challenges affecting onshore wind farm projects. Developers need to explore ways in which to mitigate the risks they face.

wind turbine farm sundown

The drive towards net zero carbon emissions was given yet greater impetus by the recent COP 26 talks in Glasgow. Development of sustainable energy sources remains at the forefront of the effort to reduce carbon emissions and the production of wind energy will play an increasingly important role. Not only are we likely to see an increasing volume of projects, but also a surge in demand for the materials needed to complete them.

The past 18 months, however, have posed several challenges to developers of wind farm projects, both on and off shore. The rising costs of raw materials — which market commentators expect to last until at least 2023 — has been fuelled in large part by a supply chain crunch caused by the COVID-19 pandemic as well as the unexpected increased cost of labour. For original equipment manufacturers (OEMs) involved in wind farm projects, this has been exacerbated by hikes in prices for other components needed to build turbines and has increased transportation and fuel costs, among other things.

These dynamics have meant that some projects have faced financial difficulties and/or severe delays. Developers already working with tight margins, with budgeted values set 18 to 24 months ago while projects were in the development stages, may now have to return to lenders for more debt or try to renegotiate Power Purchase Agreements (PPAs) or grants in order to ensure project viability.

Against this backdrop, the insurance market for renewable energy is showing signs of reducing pricing volatility as underwriters begin to feel more comfortable with pricing, coverage and retention levels. Risk professionals and brokers have a vital role to play here in making sure there is ongoing dialogue between all parties involved in the transfer of risk, and that those risks are understood. Insurers are feeling more comfortable with the pricing and retention levels for renewable energy risks following recent major increases in baseline rates and deductibles. There is also more interest from insurers that historically had not written renewable energy assets, giving rise to a more competitive marketplace that will continue to emerge over the next few years. However, insureds should remain aware of changes in the industry and the potential exposures in order to avoid a return to price and coverage volatility.

Peter Fitzsimmons, Head of Onshore Renewable Energy for Axis, said: “The current disruption in the renewable energy industry has the potential to generate outsized and unexpected losses as the exposure differs to where we were a couple of years ago. We urge insureds to remain aware of what is happening in the industry or risk further significant tightening of terms and rate increases.”

Greater clarity on the risks

With OEMs grappling with the changing costs in their supply chain, it has become even more important for discussions about risk to begin early and to consider project risks throughout the asset’s lifecycle — from the feasibility stage onwards. It is vital for both the buyer and the insurer to have an as accurate as possible handle on the value of equipment being insured.

Getting brokers and advisers engaged in discussions early can give everyone a clearer picture of the risks and opportunities involved in onshore wind farm projects. In the pre-project-planning stages, brokers can assist with risk modelling and analytics that can give projects greater bankability; identify ways to improve risk management and reduce volatility; and give a more stable picture of the total cost of risk of projects.

Brokers can offer valuation services, as part of engineering reviews that can enable all parties to have greater clarity over not just the replacement costs of parts and equipment, but also on the costs of shipping and logistics. This leads to greater accuracy on the sums insured, meaning less volatility over the lifetime of an insurance policy and greater certainty for all involved.

For operational assets, disparities in the sale value of plant compared with the replacement costs can cause headaches for insurers and clients alike. A greater emphasis on the methodology used to determine sums insured, as well as regular — and realistic — reviews, will help to give a more accurate analysis of the sums insured, giving insurers greater certainty and peace of mind.

While there are typically escalation provisions in policies, insurers are paying greater attention to the accuracy of the declared insured sums and the breakdown of values of components. Improved accuracy will help avoid underinsurance and any shortfall in the event of a claim.

Insurers also are increasing their focus on Operations & Maintenance Agreements. In recent months, some OEMs had sought to reduce their own contract risks here, thereby pushing more requirements onto insurance and increasing insurers’ risks exposure. This can result in a reduced underwriter appetite for covering these projects. Again, early engagement from brokers, and discussions around the potential impact of any changes to these contracts on insurance coverage, is vital for ensuring that developers understand the implication of risk transfer between various contracts.

The risk modelling and analytics provided by brokers can also be applied to understanding risks in the supply chain. Also, frequent business continuity reviews can help identify issues along the supply chain and help build a more resilient operation. Pinch points in supply chains have been a major factor in recent challenges faced by OEMs. Having a clearer picture of suppliers and supply chain risks can help to reduce volatility and provide the insurance market with a greater degree of comfort.

Moving forward

After an 18 to 24 month period of some volatility in insurance markets as underwriters grappled to get to grips with pricing and retention levels, we are now seeing greater stability. However, OEMs are still facing cost and supply chain challenges, which have the potential to result in outsized insurance losses.

As we move forward, a better understanding of risks – with upfront, clear, and ongoing dialogue transfer — will be vital for ensuring that the insurance market remains comfortable with projects and is willing to offer the solutions that developers and OEMs require.

A better understanding by all of the risks, and the knock-on effects that these can have over a project’s lifecycle, is crucial to the long-term sustainability of the industry. Continued communication and open dialogue will ensure wind farm projects remain bankable and that the risk is managed and shared in an efficient, sustainable way.

If you have any questions about onshore wind projects, please contact your Marsh adviser.

Related articles