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Challenges facing onshore wind projects and how to manage the risks

The challenges facing onshore wind projects and how to manage the risks

The COP26 climate conference in Glasgow brought a renewed focus on achieving net zero – when the carbon we release into the atmosphere is balanced by the amount of carbon we remove. Reducing carbon emissions is a big part of that, in particular through an expansion of renewable energy production, where wind energy seems set to play an increasingly important role. 

As a result, we are likely to see ever more onshore wind farm projects, which will in turn drive a surge in demand for the materials needed to complete them. However, for developers seeking to deliver these projects, challenges remain. 

Rising costs and project delays

First of all the cost of the raw materials required for onshore wind projects is on the rise, a trend that is expected to continue until at least 2023. That is partly down to supply chain disruption caused by the COVID-19 pandemic, but is also being driven by unexpected increases in the cost of labour. 

Meanwhile, for wind farm equipment manufacturers involved in renewable energy projects, the situation has been made worse by higher prices for some wind turbine components, as well as increased transportation and fuel costs. 

Together, these issues have left some projects facing financial difficulties and/or severe delays as costs soar above budgets set 18 months to two years previously during project planning.This has left some developers with no option but to go back to lenders or investors seeking more funds, renegotiate Power Purchase Agreements (PPAs) or rely on grants to ensure project viability. 

Risk and insurance

In better news, the markets for renewable energy project insurance and wind energy insurance are showing signs of greater stability. These markets are becoming less volatile as the risks become better understood and, in turn, insurers become more comfortable with pricing, coverage and retention levels for renewable energy risks.  

In addition the market for these covers is becoming more competitive because insurers that had previously shied away from renewable energy risks are now showing more interest – a trend that is expected to continue over the next five years. 

However, it must be remembered that this positive news follows a period of major increases in baseline rates and deductibles, so organisations involved in renewal energy projects and wind farm operators should remain acutely aware of changes in the industry – including rising costs and project delay risks - in order to avoid a return to price and coverage volatility. 

Peter Fitzsimmons, Head of Onshore Renewable Energy for Axis, said: “The current disruption in the renewable energy industry has the potential to generate outsized and unexpected losses as the exposure differs to where we were a couple of years ago. We urge insureds to remain aware of what is happening in the industry or risk further significant tightening of terms and rate increases.” 

Risk professionals and insurance brokers have a vital role to play here, working to promote closer collaboration between renewable energy businesses and insurers. The goal here is to bring greater clarity on project and operational risks – and thereby helping to minimise the uncertainties than can affect the stability of pricing and insurance coverage. 

Engage early for greater clarity on the risks

In the context of rising supply chain costs, it is now even more important for discussions about risk and insurance to begin early and to consider project risks throughout the asset’s lifecycle — from the feasibility stage onwards. It is vital for both the buyer and the insurer to have an accurate as possible handle on the value of equipment being insured. 

Again, getting brokers and advisers engaged in discussions early can give everyone a clearer picture of the risks and opportunities involved in onshore wind farm projects.  

In the pre-project-planning stages, brokers can assist with risk modelling and analytics that can improve the financial viability of onshore wind projects, identify ways to improve risk management and reduce uncertainty, and offer a more stable, complete picture of project risks. 

Sums insured

For instance, understanding of the level of renewable energy project insurance or onshore wind insurance required, which can bring greater stability over the lifetime of a wind energy and renewal energy project insurance policies. 

Meanwhile, in the case of operational assets, differences between the sale value and replacement cost of renewable energy plant can also cause headaches for insurers and clients. Again, a more accurate understanding of the level of insurance cover required as well as regular — and realistic — reviews, will help to give insurers greater certainty and peace of mind. 

To put this in context, ensuring the accuracy of insurance coverage is now more important than ever, even though policies typically include escalation provisions.  Insurers are already paying greater attention to the accuracy of insured sums and the breakdown of values of components - so improved accuracy will help avoid underinsurance and any shortfall in the event of a claim. 

Managing contract risk 

In the meantime, insurers also are more focused on Operations & Maintenance Agreements. That is because some equipment manufacturers have recently sought to reduce their own contract risks, which increases insurers’ exposure and can result in a reduced appetite to cover these projects.  

Once more, early engagement with brokers, and discussions around the potential impact of any changes to these contracts on insurance coverage, is vital to ensuring that onshore wind developers understand the implications of a shifting balance of risk in Operations & Maintenance Agreements. 

At the same time, brokers’ risk modelling and analytics can also be used to better understanding risks in the supply chain, while frequent business continuity reviews can help identify issues along the supply chain and help build more resilient operations.  

In the absence of this clarity, pinch points in supply chains have been a major factor in recent challenges faced by equipment manufacturers – so having a clearer picture of supplier and supply chain risks can help to reduce volatility and provide the insurance market with a greater degree of comfort. 

Moving forward

After an 18 to 24 month period of some volatility in wind energy insurance and renewable energy project insurance markets, we are now seeing greater stability. However, equipment manufacturers are still facing cost and supply chain challenges, which have the potential to result in significant insurance losses. 

As we move forward, a better understanding of risks – based on upfront, clear, and ongoing dialogue — will be vital to ensuring that the insurance market remains comfortable with projects and is willing to offer the solutions that developers and equipment manufacturers require. 

A better, more collaborative understanding of the risks, and the knock-on effects that these can have over a project’s lifecycle, is crucial to the long-term sustainability of the industry. Continued communication and open dialogue will ensure onshore wind farm projects remain viable and that risk is managed and shared in an efficient, sustainable way. 

Here to help 

For further information, read about the renewable energy project insurance and wind energy insurance available from Marsh Commercial, or speak to our renewable energy risk specialists for help and support. 

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