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Offshore wind projects wouldn’t get off the ground without insurance in place. But stretched supply lines for developers has brought risk quality into focus for specialist underwriters, according to Markel’s Matt Rowland

It’s not always obvious how much the insurance industry contributes to projects that add to the common good. But the de-risking of sustainable energy projects is one area where it is self-evident.

In particular, insurance underwriters’ role in covering the installation and operation of offshore wind turbines is key to the global transition away from fossil fuels. When a project has a secure and well-structured insurance solution in place, it’s more attractive for lenders to finance it.

The fast expansion of offshore wind energy around the world is leading to worries about the availability of contractors and original equipment (which is already stretched)
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But the dash for offshore wind is putting the sector’s supply chains under growing pressure – and causing leading energy re/insurance companies to tighten their focus on underwriting, according to Matt Rowland, senior underwriter in Markel's London-based renewable energy team.

“The fast expansion of offshore wind energy around the world is leading to worries about the availability of contractors and original equipment (which is already stretched),” Rowland says. “Expertise and construction equipment is mostly European, but it’s serving a worldwide industry. Everywhere you look there is project shortage risk.”

More than 21GW of offshore wind was connected to the grid in 2021, making it the best ever year for the offshore wind industry and, as numbers are tallied, 2022 is likely to be another record-breaking year for offshore wind growth globally, according to the Global Wind Energy Council (GWEC).

GWEC points to sustained planned growth. For example, the European Commission recently released the REPowerEU plan, aiming to achieve independence for Europe from Russian fossil fuels well before 2030.

The Esbjerg Declaration from the North Sea nations of Denmark, the Netherlands, Belgium and Germany set out a new target of 150GW of offshore wind by 2050. The UK government raised its offshore wind target by another 10GW, to 50GW by 2030; and Vietnam is targeting a huge offshore wind increase in its PDP8 (Power Development Plan 8).

In the US, the total announced offshore wind procurement targets at the state level increased by 28.6% to nearly 50GW within a year. In Australia, the Victoria State Government has set a target of 9GW of offshore wind by 2030. In Asia, there’s growth in Japan, Taiwan and Korea.

Supply chains strained

Established supply chains, beset by shortages and logistic issues, are struggling, however, and that doesn’t fill underwriters with confidence around claims. There are lengthy lead times for some component replacements to be manufactured, for example. An export cable failure that requires a longer length than the available spare would face a lengthy delay due to lack of capacity in the manufacturing sector, he explains.

Shortage of service supply vessels is another problem. When there is a loss and a suitable vessel is required at short notice to perform repairs, then associated costs will be far higher than they had been previously.

Supply chain shortages are exacerbating other claims severity and frequency issues for underwriters. The size of wind turbine generators (WTGs) has accelerated at an exponential rate, with the insurance market asked to insure new variants with little commercial, operational experience.

Too little global expertise in the project development/construction arena is another growing problem: “Europe is exporting its expertise to Asia (except China) and now to the USA, while at the same time undergoing a second (and much larger) offshore wind construction boom in European waters. There aren’t sufficient experts to service all regions at the current rate of growth.”

Complexity and scalability

As well as a worryingly overstretched supply chains for standard builds, the growing complexity and sheer size of offshore wind projects is proving a challenge for underwriters. A potential growing demand for floating offshore installations (as opposed to fixed platform turbines) adds another risk dimension, for example: “Floating structure technology has existed in the oil and gas industry for years, but it is a relatively new challenge for wind turbines, from a technical point of view, compared with a static installation,” Rowland points out.

Size is an issue for both fixed and floating installations, as WTGs keep growing in size: “Five or six years ago, a 5MW turbine was big, but we now see submissions for 15-16MW. Again, it puts more strain on the supply chain. It has a knock-on effect on what heavy lift vessels can be used to install them; the sub-station infrastructure required is bigger as well, weighing in at 10,000 tons for certain projects.”

Location also has to be factored into the risk register because more offshore wind farms are being sited further out to sea: “Projects are up to 150km offshore, and that sort of distance has big implications for the electrical infrastructure and cabling, especially the export cabling. It’s a challenge,” Rowland says.

Wind in their sails

Insurance capacity is readily available for offshore wind projects, both construction and operational, despite the insurability demands placed on underwriters. Owner-controlled insurance programs are the most common structures today, as opposed to contractor controlled. Individual large developers of a project employ contractors and suppliers in a multi-contract package. The developer also typically manages the project, along with the insurance protection, including the underlying insurances they expect the contractors to carry.

Finding willing insurance capacity is not a problem, Rowland says: “There is plenty of insurance capacity for renewable energy, because it represents an attractive, long-term growth opportunity in the energy space. It also aligns with the insurance industry’s collective effort to support the transition to net zero.”

Will more capacity mean a return to soft market underwriting, particularly around terms and conditions? “Price won’t kill us, but cover will. There is a real concern about the level of cover that’s being given away too easily,” Rowland says.

Meaningful deductibles, retentions and sub-limits are important as well: “As a market we should maintain dialogue with insureds to explain any underwriting issues, while always remembering that insurers need to remain relevant and not impose overly tough terms and conditions.”

Learn from experience

The insurance industry needs to engage with developers early so that insurers’ concerns about offshore wind can be discussed and addressed as early as possible and avoid surprises in cover and/or pricing. “The insurance sector has very valid ‘lessons learned’ information that it can pass on to offshore wind developers and owners to mitigate the effect of insurance on the successful development of offshore wind projects.”

It's an important function that self-insurance, through captive arrangements, can’t necessarily fulfil. But there are other good reasons to rely on established global specialist insurers like Markel, Rowland stresses. Namely, the insurance market can offer an all-encompassing set of products that can fully insure a project from the hard construction elements through to subsequent operations alongside cyber, terrorism and other such products.

“Some of these products are not available or are excluded from the coverages that certain captives/mutual arrangements can supply. Insurers can work with captives to ensure that the whole project has an insurance solution to the major areas of exposure faced when building or operating an offshore wind farm.”


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