Winds of change – reviewing renewables risk

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Ambitious plans are afoot to develop more offshore wind farms off the UK coast which promise a massive boost to this fledgling sector.

The £100bn project to build and operate thousands of wind turbines some 200 km out at sea will present huge technological challenges. But established and experienced insurers in London are on hand with their risk expertise.

Boosting the green economy

In January the government accepted bids from some of the world’s largest energy companies to develop nine wind farms off the British coast. Big names in the power sector, including Eon, Statoil, RWE, Vattenfall and Scottish Power are vying to take part in one of the biggest renewable infrastructure projects to date, that could see 6,000 giant turbines off the coasts of Scotland, Yorkshire, Norfolk, Sussex, and the Bristol Channel.

The planned development signals an enormous “step change” in global demand for offshore wind, which will stimulate large scale new manufacturing investment, according to Renewable UK, the trade body for the UK wind and marine renewables industries.

Nine vast new offshore wind farm zones with a total capacity of 32GW would, if fully developed, be enough to power every home in the UK, according to the trade body. The project would also mean the creation of 45,000 UK-based jobs in manufacturing, operations and maintenance, and generate a potential £4.2bn per year in revenue for the economy.

Wind blows in the UK’s favour

With its relatively shallow waters extending out into the windblown North Sea, the UK potentially has the largest offshore wind resource in the world. It is estimated to have one third of the European potential offshore wind market, enough to power every home in the country three times over, says Renewables UK.

The UK is a world leader in offshore wind, with nine offshore projects operational and a further five currently under construction, according to Jatin Sharma, lead renewable energy broker at Willis. But substantial investment in the offshore wind sector is also happening in Germany, Sweden, the Netherlands and Belgium, he said. And in all these markets there are ambitious plans to build ever larger, more efficient turbines in deeper waters and further from shore, he added.

The growth in offshore wind will generate business for many companies involved in the supply chain of project development including turbine manufacturers and construction companies. Financial institutions and insurers also provide critical support to such projects, helping to manage and transfer risk from the balance sheet of developers, he said.

Weathering the storm

Realising the huge potential of the offshore wind sector will not all be plain sailing, said Sharma. “Stormy waters lie ahead, with consenting hurdles, escalating costs for turbines, project delays and transmission and distribution challenging even the most experienced project developers.”

For that reason, the offshore wind sector remains relatively high risk, said Sharma. Key exposures include those that arise from new technologies requiring innovative installation methodologies, appropriateness of vessel type and availability and the time constrained weather window in which turbines are installed, he said.

During the operational phase, turbines are exposed to lightning strikes, machinery breakdown, fire damage and the risk of collision with marine vessels. But high winds are not usually an issue for turbines which are designed to withstand harsh conditions, and such damage is less common in the market, said Sharma. He added that cooperation and strategic alliances between utility companies, offshore wind operators and supply chain partners will add experience and expertise to future projects and help spread and reduce risks.

Critical role for insurance

The offshore wind industry is already well-established, with numerous major projects currently operating both on and offshore worldwide, said Chris White, head of the energy division at Chaucer Syndicate 1084. And there are many more projects planned, with governments and energy companies committing major capital expenditure in this area.

Insurers have a very important role in the expansion of this sector in that they provide the security and backing without which these projects would not be viable, he said, adding: “Capital providers and lenders will only commit if adequate insurance is in place.” Lloyd’s offers construction all risks – which includes physical damage, cargo, liabilities, maintenance and advanced loss of profits – and on the operating side, there is physical damage, machinery breakdown, liabilities and business interruption, said White.

Meeting challenges in partnership

Chaucer is very much involved with developments in the offshore wind market, both in London and through its office in Copenhagen, said White. The company has extensive relationships with many of the European firms involved with offshore wind both on the construction and operating sides, he added.

“Insurers in Lloyd’s are well-positioned to partner various projects of this nature because of their specialist knowledge,” White said. “We have specialist engineers to advise on worldwide best practice and loss adjusters to expedite assistance and get the projects up and running with minimal delay and disruption.”

London is the natural home for the insurance expertise and capacity required by the offshore sector, said Sharma. “Underwriters and brokers have been building their expertise in renewable energies like offshore wind, and it is excellent to see that many are partnering with specialist engineering companies to better understand the sector.”

Source: Lloyds

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