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Contractual risk management: key considerations for renewable energy projects

Risk professionals can face a number of contractual risk challenges when managing renewable energy projects. Take these steps to overcome pain points and mitigate risks.

11/20/2021 · 3 minute read

As investments in renewable energy assets grow, few operations are as critical to a project’s success as the risk management due diligence process; and it’s not as simple as purchasing an insurance policy. Sophisticated risk management increasingly requires thoughtful consideration and analysis of key risks in development and throughout the life of a project or across a portfolio of assets.

When overseeing renewable energy projects, risk professionals should be mindful of several common challenges. Renewable energy industry leaders can differentiate themselves by working with experienced and knowledgeable brokers to address those challenges.

Managing Multiple Contracts

A renewable energy project will typically involve several contracts, each of which is negotiated separately and subject to varying insurance requirements. What’s more, these agreements are often established years before any associated insurance coverage is purchased.

To the stakeholders negotiating these contracts, the key objectives are cost and timing, with risk management typically being further down the list of priorities.

Lenders and Lenders’ Consultants

To ensure their interests are properly protected, lenders often engage independent consultants to develop or review the insurance requirements in agreements. These third-party consultants do not negotiate on behalf of the lenders, nor do they recommend appropriate coverage for specific exposures or projects. Rather, they advise lenders as to what insurance requirements should be considered generally acceptable. This has the potential to leave gaps or inappropriate insurance requirements that do not align with current market standards or conditions.

New Technologies

A growing concern and continued area of focus for insurers is the use of prototypical technology. To prevent routine maintenance from becoming insured events, underwriters are likely to scrutinise:

What warranties are in place.
What costs are embedded in contracts.
Who could ultimately be liable for potential claims associated with new technologies.
The overall bankability of manufacturers and associated ability to honor warranty claims

Specialisation Matters

Renewable energy asset owners should select brokers with renewable energy expertise, engineering resources and that have demonstrable strong relationships with insurers, lenders, and their consultants.

Specialised risk advisors who understand the industry and can anticipate the distinct challenges of renewable energy projects can make a significant difference in the performance of your risk management strategy and overall total cost risk. These experienced advisors can enable greater access to insurance coverage and financing — ultimately yielding better outcomes for asset owners’ renewable energy portfolios.

How an Experienced Broker Can Help

Proactive owners and developers engage their brokers early in the process. The right broker can act as a guide through the risk management and insurance purchasing processes, supporting stakeholders through:

Proactive risk identification. An objective, analytics-based approach to quantifying and assessing critical risks is crucial to anticipating key challenges that may not be apparent at the outset. Early identification of risks may help to ease potential frustrations with insurance requirements and procurements further down the road.
Equitable risk allocation. Brokers, alongside legal counsel, can review agreements to ensure that risk is appropriately transferred between parties, and that contract provisions contemplate exposures that are relevant to a given project or technology.
Reasonable insurance requirements in contracts. Insurance market conditions can change substantially between the time agreements are executed and when insurance is purchased. Brokers can work with a project owner and its legal counsel to ensure that required insurance is reasonable and commercially available, and to introduce wording that allows for greater flexibility in the face of market fluctuations over the life of the asset or contract, reducting the need to seek amendments to agreements at a later stage.
Standard terms and conditions for key contracts. Standardised language, based on the asset owner’s comfort level and vetted by a broker, can help to improve efficiency while also limiting risk. Any proposed deviation from such terms and conditions should be carefully considered as it may constitute a significant alteration to the risk profile.

As the renewable energy industry continues to expand, and insurer underwriting standards tighten, it is all the more vital for asset owners to adopt sophisticated risk management tools and strategies to ensure the long-term success and profitability of their projects. A qualified broker and specialty risk advisor is a cornerstone of these activities.

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