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Is insurance killing innovation?

WORLDWIDE: As developers look beyond their own balance sheets to fund larger wind projects, especially offshore, the role of the insurance underwriters grows in importance. But is satisfying the risk aversion of outside investors stifling innovation in the wind industry?

Two Areva 5MW turbines installed at Germany's Alpha Ventus offshore wind project began malfunctioning just months after being commissioned in 2010. The problem was traced to a decision by a supplier to change the coating on the gearbox sliding bearings from zinc to a less-expensive zinc-aluminium alloy that caused temperature spikes in the nacelle. The nacelles on all six Areva turbines at the site ended up being replaced at a cost of EUR25 billion and months of lost energy production.

The incident helps illustrate the pitfalls that can arise as the wind energy industry tries to balance the need to find innovative new ways to drive down costs and boost production against the necessity for reliable, well-proven technology. The challenge is compounded by the fact that, as project sizes increase and the financial requirements of the industry grow, owners and developers have had to look beyond their own balance sheets to outside institutional investors with much less appetite for risk.

"They have a very different view of our world," says Andrew Bellamy, a director at renewables advisory firm Aarufield. "On the investment side it is literally: 'are we going to get our money back, and how much will we get back?' And that is the end of the discussion."

The need to reassure potential investors that technology defects, delays in start-up or unplanned downtime will not affect their returns is growing and, along with it, the influence of the insurance industry.

A 2013 study sponsored by insurance group Swiss RE predicted premiums paid by renewable-energy producers for insurance and other risk-mitigation products will increase from the current $850 million (€782 million) to anywhere between $1.5 billion and $2.8 billion by the end of this decade.

Due diligence

Mitigating technology risk while ensuring technological progress continues is an area where insurers can play a role, says Jatin Sharma, head of business development for GCube, an underwriter active in the renewables sector.

"We've been open to looking at new turbine technology. Bigger, larger, often zero-series production. We have also been involved in underwriting floating turbines in Europe and Japan," Sharma says. "We've spent a lot in due diligence to get comfortable with some of these new concepts and make sure that insurance is not a barrier to innovation."

At the same time, however, insurers are cautious about advancements that go too far too soon. "When we talk about the ramp-up of new technology, I think it has to be a step-by-step demonstration that goes from proof of concept to utility scale. Where the insurance industry has been nervous is where people try to go offshore too quickly with concepts," Sharma says. As an example, he points to large claims arising from design defects in gravity-based foundations that cost the insurance industry €15-18 million at one project alone.

"We've seen the losses, cost overruns, schedule slippages that arise from innovation," he says. "But I would argue it wasn't innovation that led to these issues. It was quality-control failure, lack of risk management, and lack of contingency planning."

The first few projects using a new technology are subject to higher risk premiums, says Sharma, a trade-off the industry has to accept in order to allow it to be commercially proven. This could have an indirect impact on the technology choices developers make, but insurers can also play a more direct role in helping determine the turbines chosen for a project. "It depends on the size of our clients and how sophisticated they are. Those that have a 2GW or 3GW portfolio will have a pretty good opinion, and have their own base case of how things perform," says Sharma.

"That said, if a manufacturer has come out with a relatively new model, most clients will call us and ask if we have any reservations, whether their premiums will be higher because it is a new model, or whether we have had any issues with a particular turbine. I would say we're a major contributor to the decision. We are definitely another party they consult with."

Problem areas

Transparency around claims history and failure rates is important, Sharma adds. "We have a 58GW pool of global data, plus all the business that we decline every year, which is probably another 50GW of data," he says. "We have a pretty good understanding of what fails, when it fails, which turbines are problematic, which turbines are probably at the wrong site, which manufacturers are not honouring what they say in their agreements, and which companies are particularly slow at providing replacement parts when you require them."

Data sharing

Sharing that data with clients can help them build better projects and operate them more effectively, Sharma says. It can also play a role in technology improvements for the broader industry by focusing attention on problem areas. Gearboxes are a case in point, says Aaron Barr, senior technology manager at Make Consulting.

"Insurance claims for gearboxes were quite high a few years ago, and this forced turbine manufacturers, gearbox suppliers and service companies to double their efforts to make more reliable equipment, implement condition monitoring systems and innovate lower-cost uptower repairs," he says.

There are still lessons to learn if the industry is going to maintain the confidence of risk-averse outside investors. Accidents happen, especially at sea, as seen by the capsizing in July 2014 of a barge carrying €28 million worth of cables for German offshore projects.

Sharma points to a contractor delivering two transformers from the Netherlands to the London Array project. By putting them on the same vessel the contractor could have saved around €500,000 on transportation costs, Sharma says, but would have had to have the insurer's consent or the insurance could have been voided. Transformers for the North Sea can cost €80-120 million and take two years to replace, so the financial repercussions of an uninsured accident would have been considerable.

If something had gone wrong on that journey, without insurance, it would have been game over, says Sharma. "It would put off every major institutional investor in the market."


While insurance industry competition and market maturity have brought wind-energy insurance costs down in western Europe and the US, the average premium per megawatt has increased in recent years as the sector moves into riskier offshore and emerging markets.

Insurance premiums for offshore projects during the construction period are around €30,000-35,000/MW, while coverage during the operational phase costs anything from €5,000-20,000/MW. Premiums for onshore projects are generally about one eighth of offshore.

Cables are the biggest single cause of offshore claims, with problems mainly occurring during the installation period because of factors ranging from poor handling by contractors to seabed conditions at the site. Once the projects are in operation, claims tend to be focused on mechanical and electrical breakdown, blade damage, operational cable faults, and gearbox failures.

"The number of claims we see in offshore wind tend to be less frequent because the deductibles are much higher, there are much bigger balance sheets supporting offshore wind, and the condition monitoring systems are generally much better," says Jatin Sharma, head of business development at GCube.

Claims onshore are mainly for blades, followed by gearboxes and generators. "Our larger claims have come from turbine fires, tower collapses and transformer failures," says Sharma.

Insurance products have also been developed to hedge against weather variation and policy risks, while a recent study by Swiss RE pointed to a growing interest in products to manage the variations in cash flow linked to market-related risks such as curtailment or power price volatility. However, insurance mainly comes into play during construction and operation, protecting against damage, equipment failure, delays and unforeseen downtime.

The construction and operation phases are insured separately, with coverage during operations renewed annually. Although premiums can rise as turbines grow older, says Sharma, owners sometime opt to contain costs by reducing coverage. If claims are frequent and particularly large, project owners may be susceptible to rate increases.

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