Jonny Allen

A long with the environmental benefits of clean energy, the economic value of offshore wind power in America is expected to be notable. An Eastern seaboard state in the U.S. could expect at least $600 million in economic benefits from one offshore wind farm, according to the advocacy group, Environmental Entrepreneurs.

For offshore wind projects to deliver in the U.S., however, reliability is key. Yet these wind farms face several risks given the harsh conditions of a marine environment. This means developers must fully understand those risks and properly insure projects to avoid unexpected losses.

In the February 2019 Windpower Engineering & Development issue, Jonny Allen, Senior Underwriter and Head of Offshore Wind at global insurance company Travelers, answered questions relating to insurance and offshore wind sites.

Here, Allen shares more of his insight on the industry, based on his several years of wind experience in Europe.

Offshore wind projects present unique challenges and risks, which means insurance is critical to protect developers from unexpected losses. It is important to seek the advice of a qualified underwriter with experience in the wind business to mitigate project risks and maximize coverage.

Q. In what ways does the offshore wind industry differ from the onshore sector concerning risk?
A. The transportation, installation, project architecture, including wind-turbine foundations and electrical cabling, are far more complex in a marine environment. This means underwriters must consider the combined risks of vessels, heavy lifts, winds, waves, and tight scheduling for offshore projects.

However, most of the offshore wind risk is present during the underwater construction phase of a project, known as the subsea work (such as the cabling) — and well before a turbine tower or nacelle leaves the harbor.

Insurance requirements for the offshore wind industry must be specific to the project location, layout, suppliers, installers, and operators, and the range of potential coverage is much greater than for onshore wind.

The project size and complexity can also be far more significant, so considerations for both developers and insurers to get the balance of risk and premium correct is even more critical offshore.

Nonetheless, offshore and onshore wind projects do have similarities. The wind turbines are typically manufactured by the same suppliers and share similar risks relating to component breakdowns, weather events, and electrical outages, which require sophisticated insurance products.

Q. How soon should a wind developer secure an insurance plan for a project?
A. Typically, we see engagement with insurers six to 12 months before a project’s financial close for established offshore wind territories. Longer lead times allow underwriters more time and input into decisions that can affect a project’s risk, which could lead to considerable cost savings in the future. Early project tasks, such as surveying the project site or installing meteorological masts or light detection and ranging technology (LiDAR), can require liability coverage. The sooner such discussions are had with a broker, the better to maintain a project’s timeline.

Q. Are there standard insurance policies available to offshore developers?
A. In a broad sense, operational and construction policies have a standard framework but with key clauses that are specific to offshore wind. This may include clauses that cover the different exposures typical of new project territories, such as hurricanes on the East Coast of the U.S. or typhoon risks in Asia. The policies are then tailored to a specific project. Since each offshore wind developer has its own risk appetite, the policies can vary widely.

Q. How do federal marine regulations, such as the Jones Act, affect insurance policies for offshore wind?
A. Underwriters are often investigating how changing construction methods can increase or decrease risk profiles. In general, more complexity means higher risk, which can impact a project’s profile.

The Jones Act is a good example of how decisions made by current project developers may improve risk profiles. These choices, for example, may stimulate American shipbuilders to meet the challenge of providing a fleet of new vessels — which may sustain the offshore wind sector for decades to come.

In the near term, however, this will likely require increased transit times from staging areas outside of U.S. waters or the use of feeder barges and jack-up vessels. Both have different but increased risk profiles, which insurers must consider.

Q. Are there certain transportation or port infrastructure risks that developers should consider during the construction phase of a project?
A. In Europe, offshore projects often have the benefit of multiple port options, which can drive efficiencies when developing a construction schedule. Risks still exist, however. One example is the spatial requirements at ports to meet the increasing size of wind turbines.

Access to secure storage for materials is another consideration when selecting a port. Also, harbors must properly accommodate the vessels required during the construction of a wind farm.

Underwriters might question traditional property risks, such as security and exposure to weather events. Typically, pre-commissioning of turbines is now done onshore to decrease hours offshore, and this includes the risk of lifting errors or electrical breakdown increases.

As developers begin to share port facilities, the chances of an accident or event impacting several projects increases, which insurers view as an accumulation of exposure. This may lead to the continuation of underwriting such risks. A multi-line insurer with expertise in offshore wind and writing ports and terminals will be highly valuable because of his or her understanding of the changing risk requirements of project developers.

Q. Can you share how O&M challenges may affect insurance costs from turbine downtime?
A. One current O&M challenge is distance for projects situated far from shore, which requires long transit times, floating accommodation platforms, or possible helicopter transfers. One way to offset these risks is to increase the use of predictive monitoring so that wind-farm maintenance is only performed when essential.

This typically means greater upfront costs and developers require a certain confidence that it would be repaid over the lifetime of a project. It is the job of insurers to understand and share what insurance savings these offshore investments may produce over time.

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The implications of patent infringement can be substantial but this risk can be quantified and mitigated, says InteStor. However, companies must be more proactive to deal with IP risk during project diligence.

IntelStor has found that these losses are partly in the form of legal damages — to the tune of $165 million — and that a bigger chunk is directly related to the other commercial impacts associated with an intellectual property dispute. These include blocking of product sales, denial of market access, and the loss of revenue from aftermarket part sales for those non-existent product sales, as well as the accompanying service contracts, which are becoming increasingly lucrative as assets age.

Companies have a right to enforce their IP rights, says IntelStor, but when those IP rights are used to exclude competition from markets, it eliminates choice for project developers when it comes to supply contracts. This weaponization of intellectual property rights has cost companies more than $3.65 billion in product sales, $386 million in aftermarket part sales, and $1.02 billion in services revenue.

The industry is still at risk, with potentially billions in patent infringement liability still not formally mitigated during a project finance due diligence. For instance, the industry would have faced a total of more than $11 billion if Enercon had been more successful with their enforcement licensing activities against Vestas and Siemens Gamesa.

Beyond those avoided costs, every single wind energy project, which goes through a project finance diligence almost never takes into account the commercial impacts to the project developers and asset owners, which are contractually left very murky and favorable to the supply companies resulting from clauses related to intellectual property risk. This is to the detriment of the developer, financier and insurance carrier in case a dispute between two equipment suppliers erupts.

Although the frequency of this occurring may be considered rare versus other risks that are routinely underwritten, the price tag for being on the wrong side of an intellectual property infringement can be substantial.

Famously, Enercon GmbH not only sued Gamesa for patent infringement liability in Spain on a wind-turbine control patent, but they also sent demand letters to the asset owners of the Gamesa products they believed to infringe their patent. Those asset owners were contractually liable for some of the damages, because they did not have full indemnity from patent infringement liability in the turbine supply contract.

IntelStor suggests these recommendations to safeguard developers and owners from IP infringement risks:

• Either during the request for proposals (RFP) or the turbine supply agreement (TSA) negotiations, full indemnity from patent infringement liability should be mandated.
• Just like the requirement for a turbine supplier to carry property and casualty insurance, making patent infringement indemnity insurance coverage mandatory can also be specified in the RFP or TSA negotiations.
• Whether full indemnity is provided or whether insurance is obtained, an independent validation of patent infringement risk position is possible. This data can be provided to developers / owners as well as the insurance providers during the TSA negotiation.

The consequences of this could be far-reaching because even if an injunction and a stop on production is not implemented as a result of the trial, owners could still see lost production due to a swap out of wind turbine controls or hardware, which is found to infringe patents. Additional financial liabilities can pile up for every day for which an infringement turbine is operated until or unless the software or hardware swap out is made.

In many cases the risk mitigation protocol used by most turbine suppliers is likely inadequate. Prior to a product launch into a new market, some proactive turbine suppliers conduct a freedom to operate review in order to ensure they and their prospective customers will have no risk of patent infringement liability. As a result, most turbine suppliers feel justified in their non-infringement position already and feel no additional work is required. Unfortunately, there are some turbine suppliers either are resource constrained or simply do not take the time to engage in this type of risk mitigation.

There is an opportunity for proactive companies to undergo an independent IP review and risk mitigation as part of the project finance diligence. Those companies who have proactively undertaken an independent IP review have saved more than $300 million in royalty costs avoided since 2010.

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GCube warns that competition on costs and tighter build schedules have created a new, higher “normal” loss expectancy for renewable energy projects.

In response, insurers and asset owners must reset their benchmark for renewable energy risks, in line with this higher ‘normal’ loss expectancy, according to GCube Insurance, a provider of renewable energy insurance services worldwide.

At GCube’s 15th Advisory Council last month, which gathered the leading asset owners and risk managers in the U.S. renewable energy market, concerns were raised about the impact of cost pressures on the integrity of assets and on sustainable insurance pricing. In particular, accelerated build times have led to a hitherto unforeseen amount of material damage incurred during construction.

As construction firms have come under pressure to build projects more efficiently and in shorter timeframes, less experienced personnel are being used to handle increasingly complex equipment — resulting in a higher frequency and severity of claims.

Simultaneously, two key factors have led to higher costs arising from component failure. Firstly, increased complexity means that components are harder to replace in isolation. In wind energy, with newer blades, any component damage may mean replacing the entire blade, which raises O&M costs.Secondly, uncertified models still exhibit design issues that can lead to equipment failure. While this issue may be resolved over time, continued technical innovation in the sector means that both wind and solar projects remain vulnerable to mechanical and electrical breakdown.

The recent focus on cost-cutting and efficiency has also led to diminished OEM warranty strength. In light of increased losses and amid financial pressure, the scope and quality of OEM guarantees has been reduced, meaning that asset owners may end up without sufficient OEM support when equipment fails.

“The renewables market has started to outgrow subsidies and with that comes a whole new level of competition,” said Jatin Sharma, President of GCube Insurance. “This pressure often has unforeseen results: apart from anything, increased M&A activity means you might end up with a project with a loss history that isn’t factored into calculations.”

As GCube highlighted earlier this month, these issues are exacerbated by extreme weather risk, with events such as wildfires, hurricanes and tornadoes now occurring out of season and rising to 15% of all claims in 2018. Indeed, for 2019 GCube predicts high levels of extreme weather losses, including continued wildfire claims in California, tornado damage in the South East and the trail of devastation left by another potentially active hurricane season.

The Advisory Council meeting invited a dialogue between insurers and insureds as a way to tackle these issues collectively. Insurers must adjust their loss expectancy to match the changing nature of risk; in turn, project owners must communicate their needs and project-specific features to their insurance partner.

“We cannot overstate the benefits of open discussion between insurers, asset owners and investors. There are concerns within renewables that as the industry has matured, the insurance market has not kept up,” said Sharma. “Frankly, if we want to protect our future renewables growth, we collectively need to accept that it’s not the same industry as it was five years ago. Increased price competition and a rush to acquire developer pipelines mean that some areas of the industry pose a much higher risk than before – and some aspects are more routine. It’s time to adjust our expectation of ‘normal’ risk.”

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