Adam Humphrey CEO CCS International and George Pooley Head of Renewables at loss adjuster GRS explain why the drive for increased renewable capacity is placing a greater focus on resilience.
The increasing momentum for greater sustainability across global power supply infrastructure has seen renewable energy sources move mainstream with all the major energy companies now exploring its use. Investment levels in renewable projects have never been higher and in the run up to COP26 later this year it is likely that there will be no slowdown in the sector’s growth. With the higher demand has come a move to ever larger and more complex projects which create greater exposures as the percentage of the world’s power derived from renewable sources increases.
Renewable energy is not new. For the past two decades wind, solar and tidal energy have been part of the onshore and offshore power sector. Recent years have seen renewable technologies and equipment situated in ever more challenging locations around the globe. As recent events have illustrated renewables projects are not immune from the impact of climate change.
The recent cold weather in Texas has highlighted the need to ensure protection from extreme temperatures. The failure to weatherproof the wind turbines in Texas impacted on the state’s power supply during the cold snap. But given the usual temperatures in Texas, the need (and associated costs) to be prepared for significantly sub-zero conditions may not have been a priority, but it points to the need to be prepared for various extremes.
Given that the original wind turbines were designed for Denmark and the Netherlands with flat ground and steady winds, the use of the same type of turbines in extreme conditions such as the 50-degree temperatures of Western Australia and the cooler climate of Northern Europe has challenged the resilience of the equipment. Turbines are installed with an expected 20-year operating life, however that figure can be challenged by extremes in temperature and the impact of wind shear on turbines.
Resilience concerns remain around the increasing dependence on energy from renewable sources. Where renewables were a small contributor to national power grids they are now being identified as the dominant power generation systems of the future . For example, according to the Department for Business, Energy and Industrial Strategy as of December 2020, renewable production generated more than 40% of the UK’s total electricity produced.
While catastrophic failures are thankfully rare, the pressure on systems can cause early-life issues along with extreme stress on operators. Many operators will have production and performance targets within their ‘power purchase’ contracts. The ability to meet those targets and with it the revenue, is often vital to meeting their obligations in terms of any project debt finance repayment obligations. In the event of any failure causing disruption, the parties’ priority is to return the project to full operation as quickly as possible, irrespective of whether the policy would pay for a wholesale replacement of the affected parts or a repair.
Like any new and developing technology manufacturers will seek to protect their business and currently we have, according to Wood Mackenzie, five major turbine suppliers (Original Equipment Manufacturers – OEMs) who account for 68% of the market, rising to 75% in the next 5 years. The lack of competition has an impact on pricing and while there is a healthy market for second-hand parts for insurers and those who are tasked with handling complex power claims, there is a dilemma. While providers of non-OEM parts are increasingly offering a warranty on their parts, their use can invalidate the manufacturer’s warranty for the rest of the turbine. If the aim is to restore the machinery to the position it was in before the event, the longer-term implications of the actions at the time of claim must be fully assessed.
Having dealt with the renewable energy sector for more than 15 years we are acutely aware of the issues that challenge the sector. Given the specialist nature of renewable assets and their operation, one of the most important aspects of approach is supply chain knowledge and contacts. Time after time, the ability to bring the right people in at the right time has been key to the success of our response on behalf of our clients.
The pressure on operators is significant and the insurance industry has a key role to play in ensuring that its renewable energy clients are able to deliver on their plans for growth as the drive for a fundamental shift away from fossil fuel energy continues.
As demand for insurance increases, so will the need for claims specialists who have experience of solving issues when failures occur.