Keeping the renewables recovery on track
With commitments to clean energy growing in many countries, insurers are likely to face an increasing exposure to potential construction and weather losses from on- and offshore renewable projects, against the backdrop of an evolving and challenging risk profile
A number of factors are intensifying the focus on renewable energy currently. Environmental awareness had been growing pre-COVID and post-pandemic planning is centred on a green recovery in many markets.
In the UK, at the end of last year, Prime Minister Boris Johnson announced a £12bn plan to create a “green industrial revolution” that aims to put the country on the right track to hit net zero by 2050. Last month, he confirmed that the COP26 climate conference – which it is hoped will generate progress on key climate change issues and further collaboration between nations – would take place in November 2021.
In the US, the change of administration has already seen the country re-enter the Paris Agreement and President Biden has an ambitious $2tn infrastructure and energy plan that would dramatically reshape the nation's energy landscape by offering new tax incentives for clean energy, electric transmission projects, and carbon capture and storage technology.
However, most of the growth in the US will come from offshore wind, with an estimated 30 gigawatts (GW) of generating capacity expected to be in place by 2030. From an insurer’s perspective, this means a massive exposure to East Coast named windstorms, in addition to increasing attritional construction losses already faced by offshore wind projects in established markets such as the UK and Europe.
Meanwhile, the onshore renewables risk profile is continuing to change, with unmodelled extreme weather driving rising severity and frequency of insurance claims.
Shifting market dynamics
These developments are having an impact on industry and the insurance market. The green energy transition has resulted in a clear move by the oil and gas majors into renewables. Danish power company Ørsted – previously a state-owned oil and gas company – was a first mover in the energy transition and is now the world’s leading offshore wind developer.
Elsewhere, Total has invested $8bn in renewable power since 2016 and has an ambition to increase its renewable capacity to around 100 GW in 2030. By the same date BP aims to develop 50 GW of renewable capacity and Eni 15 GW. Shell, which was recently ordered by a Dutch court to reduce its greenhouse gas emissions to 45% by 2030 from 2019 levels, has not set any specific renewable energy investment targets, but the company plans to invest in a mix of solar, offshore wind, and onshore wind projects. It is also building a 200 MW electrolysis-based hydrogen plant in the Netherlands, which will come online in 2023.
As renewable energy projects increase in size and complexity, we will see a greater need for packaged policies with large exposures...being placed on a verticalized basis
This has had a knock-on effect on the insurance market – underwriters now need to be able to underwrite across the energy portfolio: upstream, downstream, operational power and renewables. As traditional upstream energy activity declines, those insurers that may have previously focused on oil and gas business are now moving into renewables.
As renewable energy projects increase in size and complexity, we will see a greater need for packaged policies with large exposures (increasingly with Critical Cat) being placed on a verticalized basis.
So, with the renewables market set to accelerate at the same time as it has been suffering with significant and complex claims – including weather-related losses which are estimated to have risen three-fold in the past decade – the arrival of new underwriters and capacity into the space is cautiously received.
Getting to grips with the issues
However, these new arrivals will need to embark on a learning process to get to grips with rapid developments in the market. The sector is constantly evolving with technological advancements to reduce costs and improve efficiency.
For example, for many years solar was attractive to renewables underwriters. But with increasing competition costs have fallen to such a degree that question marks are being raised over the design considerations, quality of components and the competency of contractors and operations and maintenance providers.
A number of large losses due to hail, wildfire and storm damage mean that the sector has been struggling to make an underwriting profit. Technical issues have emerged around the effectiveness of moving solar panels to stow in order to protect against adverse weather conditions. This was something that was considered vital in mitigating damage, but it has been found that facing panels into or away from the wind and the angles at which the panels are stowed (actively or passively) can have unintended consequences. In some cases, facing panels into the wind has increased hail impact loads and stowing at the wrong angle has caused vibration and a “flutter” effect leading to unintended loads on components and multiple failures.
In the offshore wind market, a leading developer has identified a subsea cabling issue across up to ten wind farms in Europe, which reports suggest could lead to losses of $490mn. The issue occurs when the cable protection system (CPS) moves across the scour protection, the rocks placed on the seabed around the foundations to avoid seabed erosion, abrading the CPS and in the worst-case scenario causing the cables to fail.
On a number of operating wind farms we have also seen concerning trends of blade failures which in some cases continue to re-occur year after year.
It appears now a second layer of rock placed on top of the cables – something that had previously been standard industry practice – could have prevented the damage to the CPSs. Although there has since been a return to stabilising the cables in new wind farms under construction, further losses involving those already completed should be expected.
In onshore wind farms, there have been a material number of turbine failures due to hub locking pins located at the top of turbines (to lock the turbine and allow safe access), a problem that occurs during installation and maintenance when contractors have failed to check that pins have been fully disengaged. If they have not, operating the rotor turning gear can cause catastrophic damage to critical components and in some cases cause turbines to collapse.
On a number of operating wind farms we have also seen concerning trends of blade failures which in some cases continue to re-occur year after year. Even some of the most experienced manufacturers have had to retrofit whole fleets of turbine blades due to defective lightning protection systems which have failed to conduct lightning strikes as expected, causing multiple lightning claims to insurers.
Ensuring coverage is fit for purpose
In the face of emerging trends and shifting weather patterns – and therefore risks – due to climate change, insurance policies need to be unambiguous and respond effectively.
Taking a collaborate approach towards improving the London market offering and building awareness of the key issues impacting the market, Sompo International is actively involved in several London Market Association and Joint Rig Committee working groups.
As well as promoting the highest technical standards in the London market, with specific regard to renewables, a key focus is on the introduction of new clauses into insurance policies to clarify coverage intent and application in the context of emerging developments.
Key areas of work include:
Microcracking Endorsements – to address increasing frequency and quantum of losses attributable to microfractures/microcracking within solar photovoltaic (PV) technology;
Vegetation Management Minimum Standards – to address risk mitigation standards to help prevent the spread of wildfires;
Hub Locking Pin Guidance, Exclusions and Limitations – as described above to ensure all pins have been safely, verifiably and fully disengaged, and;
Series Loss Clauses – amendments to existing clauses to better define coverage scope and application and offer new variants of differentiated cover for serial losses.
The renewable energy sector continues to present a challenging risk profile for underwriting portfolios and this is destined to become more complex as the industry evolves.
Whilst the market has shown disciplined hardening over the last 24 months, further improvement is still necessary to ensure long term viability. It is crucial that underwriters, brokers and clients work together to protect the stability and sustainability of the insurance market so that it can effectively support the transition to renewables.