Insuring innovation: the high price of covering wind projects

Investment in the renewable energy sector in the country has grown exponentially, largely driven by new legislation and targets aimed at tackling climate change.

The Renewable Energy Association had estimated that £40 billion has been invested in the sector since 2010 and a further £48 billion investment will be required in order to meet the target of renewable energy accounting for 15 per cent of the total energy production by 2020. As such, since 2010, investment in energy infrastructure projects in the UK has exceeded that of transport, water and communications combined.

Large environmental projects such as onshore wind, solar, energy from waste and biomass have established the UK as a world leader in renewable energy, something that has attracted significant investment from overseas, to such an extent that the UK is now often widely viewed as an attractive safe haven for foreign investors.

If we look at wind specifically, the UK is the sixth-largest producer of wind power globally and has been the world leader in offshore wind power generation since 2008. We already boast the world’s three largest offshore windfarms, with the 175 turbine 630MW London Array in the Thames Estuary, the 504MW Greater Gabbard farm off the Suffolk Coast, and the 367MW Walney Wind Farm 14km west of Walney Island in Cumbria. And it is estimated that by 2020 offshore- generated wind power will account for between 8 per cent and 10 per cent of the UK’s annual electricity production.

However, with weather conditions becoming increasingly extreme, new risks are emerging which those operating in the wind energy sector need to be aware of. We recently carried out some economic research with the Institute of Directors and found that we are likely to see an increase in insurance claims as a result of these emerging risks. For example, wind turbines are particularly sensitive to natural phenomena, including lightning and extremely strong winds.

Those in the wind energy sector also need to be aware of the risks posed by design defects from new, unproven technologies. Issues occurring due to innovative blade designs or electrical faults arising from storage capacitors could also lead to businesses looking to insurers in order to fix damage.

In addition, there is the foreseeable risk of damage to undersea power transmission cables which are used to power offshore turbines – any damage to these could give rise to expensive claims for repair.

To give an idea of the scale of the financial impact that these damages can incur, experts at underwriter GCube have estimated that claims resulting from design defects could cost insurers €15-18 million for just one project. For example, in 2010, two offshore German turbines began malfunctioning just months after being commissioned. This was as a result of a cheaper gearbox coating which was causing temperature spikes in the nacelles. The nacelles on all six turbines on the farm had to be replaced – costing €25 billion, even before the financial impact to the utility company of months of downtime.

When it comes to mitigating the damage when something goes wrong, the insurance industry is already beginning to develop innovative products to cover the renewable energy sector in order to protect utilities companies. Reinsurer Swiss Re has said that it expects a 50 per cent increase in renewable energy to lead to insurance spending more than doubling in the six biggest renewable energy markets. Lloyd’s insurers also now offer products covering weather risk, political and credit risk, performance and unscheduled downtime, helping utilities companies to mitigate their risks.

However, for unproven technologies like offshore wind, the insurance market is limited and getting cover can become a lengthy process. For undersea cables, for example, insurers can be expected to go into huge detail, including examining the expertise and experience of the people that laid the cable in order to fully assess the potential risks and provide adequate cover to those who need it. The cost of fixing a damaged cable would be particularly high due to the specialist equipment required and insurers already know that the relative inaccessibility of offshore farms will require at the very least a service vessel or helicopter, and a jackup rig for heavier servicing purposes.

As a result of this, any cover is likely to be high while the insurers get a better understanding of the associated risks. Insurance premiums tend to be between €30,000 and €35,000 per MW for offshore projects under construction, and €5,000 to €20,000 per MW for those already operating – approximately eight times the cost of an onshore farm.

All this means it is vital for utility companies and insurers alike to get their cover right, in order to minimise the risk of substantial financial hits being added to the already high cost of operating in the wind power industry.