The success of a renewable energy project depends on understanding and managing a wide spectrum of risks at every stage, of which contractual risk is among the key concerns for project owners.
While renewable energy presents immense opportunity for Asia in particular, the challenges, complexities, uncertainties, as well as the number of subcontractors, vendors, and suppliers involved in a typical project mean that project owners need sophisticated risk management solutions — especially in regard to contractual obligations — in order to safeguard against potential losses and unexpected costs.
Contractual risk management is also necessary as risk transfer via insurance alone may not offer optimal coverage. This is because renewable energy insurance is transitioning to a mature market, which entails higher costs and increasing constraints for insureds. Hence, it’s vital that renewable energy industry leaders work together with experienced and specialized risk professionals, who can tailor effective solutions to manage contractor risk throughout the project lifecycle.
Contractual risk management: Simplifying the complexities
The contractual risk management framework simplifies the complexities of a renewable energy project into five key components. Project owners can use this framework to assess contractual risk and seek tailored risk management approaches and solutions:
Component 1: Technology
Establishes a clear understanding about the use of prototypical technology and the terms that insurers will scrutinize:
- 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 honour warranty claims.
Component 2: Choice of contractors
As the renewable energy marketplace grows, emerging contractors who are new to the sector are more heavily scrutinized than their project owners. There is a need to conduct due diligence on:
- The contractor's and their key personnel’s’ experience.
- Their ability to identify and anticipate key concerns.
- How they manage design and construction risks at each stage of the process.
- The involvement of the contractor in the mitigation of losses and share of accountability in the case of negligence.
Component 3: OEM responsibilities
The choice of original equipment manufacturer (OEM) and turbine model can influence the coverage that project owners are able to secure. A broker with longstanding expertise in renewable energy can provide insight and advice on how OEM parts and turbines are regarded by insurers.
Subsequently, based on the selection of a specific OEM maker and turbine type, the broker works with insurers to identify and obtain best-fit coverage while ensuring all associated costs are optimized over the project lifecycle.
Component 4: Availability of risk engineering
Risk engineering is the application of engineering methodologies to risk management to improve the risk profile of a renewable energy project, lower the risk of loss events, and consequently reduce the cost of insuring these risks.
Project owners can leverage the risk engineering capabilities of their broker to determine appropriate measures to de-risk, such as by using improved technology and ensuring redundancies such as spare parts or transformers are in place. This can help project owners secure weighted contingency amounts and lower limits.
As insurance during the operational phase typically represents the second biggest line item in a renewable energy project, the associated increase in construction expenses from the risk engineering process will be moderated by a subsequent reduction of the project’s lifecycle cost.
Component 5: Lender obligations
Both insurance and legal advisors can weigh in on the contracts early to help identify potential issues and gaps, ensure compliance, and reduce the likelihood of a breach.
Maximising your contractual risk advantages with Marsh
Partnering with the right broker is critical for effective contractual risk management and reduces the complexities of insuring a renewable energy project. Project owners can ultimately benefit from optimised cost versus risk, and enable the project to attain greater profitability overall.
An experienced renewable energy insurance broker can help ensure: