Out at sea – Insuring offshore wind
While the majority of installations are still based in the North Sea, offshore wind farms are now being established all over the world, from storm-tossed Taiwan to the US east coast. As offshore wind continues to grow, however, investors are faced with new risks to tackle. By Robert Bates, underwriter at GCube.
As ever in the insurance markets, insuring offshore wind is a complex business. The level of natural catastrophe, contractor and manufacturing risk all vary based upon the region and equipment used. Meanwhile, the industry’s reliance on new technologies can mean unexpected component failures, whether due to a lack of testing or improper installation. As some risks are contained, others may rear their head.
Historically, insurers’ biggest concern with offshore wind has been related to cabling. Installation of inter-array and export cables has covered around 80% of the claims value related to offshore projects. Nowadays, this is changing, with the value dropping to around 65% and foundation losses increasing.
The greatest risk for offshore wind arises from cable damage. Offshore wind farms – fixed or floating – require hundreds of kilometres of cabling, both export – back to the main grid – and inter-array, between the individual turbines and the substation.
While these cables are protected by steel armouring, any bend past their minimum bend radius, which is typically quite low for such cables, can result in damage. This is a problem, given that these cables must survive both the motion of the sea and the process of cable lay.
The Offshore Wind Programme Board of the ORE Catapult project cites an estimated £170,000 of loss per km of high voltage export cable, caused by a mixture of operational downtime and the costs of locating and repairing cable damage out at sea. A recent offshore wind project, for example, was delayed by over a year while a cable fault was identified and resolved.
Since the commercialisation of offshore wind, export and inter-array cables have been deployed with in-built fibre-optic cables, which allow turbine performance data to be transferred rapidly back to the operator.
These cables are theoretically an important step in reducing risk: by reporting where damage occurs or potential operational failures from maintenance data, they can streamline the substantial costs and resulting risks of sending out vessels such as jack-up barges (JUBs) and equipment to repair turbines.
However, a failure trend has emerged among transmission system operators (TSOs), the independent companies responsible for handling electricity transmission. Over the last few years, several cable failures have been seen resulting from damage to the metallic tube designed to protect the fibre-optics inside. These failures can affect a power core or even lead to the total failure of the cable system.
Their cause is uncertain, but seems to result from the relative fragility of the metallic tubes surrounding the fibre-optic cables. Tiny fractures in the metal created during either fabrication or installation may constitute weak-spots; currents induced via electro-magnetism by the neighbouring power cores, coupled with water ingress, may eventually weaken the insulation on the power cores to catastrophic failure.
Regardless of the reason, the dangers are substantial: of the recent Ofgem reports on OFTO claims, fibre-optic failures feature prominently. These problems serve as a reminder to insurers that new technology is not always a way to reduce risk, despite evident benefits: if cable failures increase, the cost may outweigh the O&M benefits.
Wanted – strong foundations
The second largest body of claims arises from turbine foundations. In the past, much of this was traceable back to a single source: a formula mistake in a widely-used design guideline issued by a prominent certification body resulted in a grouting problem.
Grouting, alongside bolting, is one of the main ways used to connect the transition piece of a turbine - the central part of an offshore turbine, to which the turbine tower is attached – to the monopile, the underwater support structure. A grouting failure can result in slippage, which is a simple yet very significant problem in which the turbine slips down the tower, resulting in major damage and heavy losses.
Nowadays, this particular problem has been resolved, yet foundation issues continue to cause major losses for offshore turbines. Again, this may be the result of newer technologies: monopiles are now being used in deeper waters, for which they were not originally designed.
This trend is something for insurers to guard against, but underwriting losses of uncertain cause is inherently difficult due to a lack of knowledge about the exact conditions that will cause a project to incur these losses. In general, the lesson to be drawn is similar to that of optic fibres: investors and their insurers should approach innovations with care.
Floating wind risks
Some of these foundation problems may be bypassed with the advent of floating offshore wind, which has seen several successful projects in the past few years and a falling levellised cost of energy (LCoE) to near-competitive levels. Floating wind, by its very nature, does not rely on a monopile or jacket sub-structures and so can avoid the risks associated with foundations.
Bearing in mind the risks of new technologies, however, floating wind will require a cautious approach from investors and insurers.
Cable risk, for a start, is increased, as cables are subject to more undersea currents and have to use dynamic catenary systems to make sure that the connection is not damaged with the movement of the turbine.
These, added to the three or more mooring lines we expect on floating turbines, will lead to quite congested subsea infrastructure, complicating installation and retrieval if necessary. Moreover, floating platforms may be subject to as-yet unknown risks, or the position of floating turbines in deep water – where wind resource and potential energy gain is higher – may result in unexpected problems. In the case of floating, higher winds may bring reward, yet also risk.
Insurance markets in Europe
While investors need to avoid throwing caution to the wind, in established markets it can be difficult to do so. The wind industry is increasingly competitive in Europe, faced with a low LCoE as a result of bigger turbines – which have grown in size from 3MW to 9.5MW in only five years – and big mergers and acquisitions that are driving smaller outfits out of business and squeezing profit margins.
This September saw a record-breaking deal in which Global Infrastructure Partners bought half of the 1.2GW Hornsea I project for £4.5bn. As governmental support for renewables wanes in a competitive market, project owners are under pressure to deliver on returns by producing energy at a lower cost.
For the insurance markets, this has both positive and negative implications. On the one hand, the dominance of big players means that project owners are more aware of risks and capable of handling them, as well as building up trusted relationships with insurers.
On the other hand, increased competition means developers have to take risks in order to stay ahead of the curve. As they strive for a lower LCoE, installation quality has taken a hit, with developers sometimes choosing to bring in components from less trusted manufacturers in countries outside of the traditional markets, such as the UAE or South Korea, or choosing lower-quality European options.
This emphasis on cost can ultimately lead to more claims, putting pressure on the capital providers that support the renewable insurance markets, and leading insurers to respond with higher prices to try and protect their margins.
Risk in emerging markets
In response to competition at home, many offshore wind developers are choosing to move abroad. Certain parts of the world offer high wind speeds in exchange for increased risk, such as the west coast of Taiwan and the north-eastern seaboard of the USA.
These regions each come with their own, unique risks. In the USA, for example, costs and personnel risk are driven up by the Jones Act, a piece of legislation that requires US projects to make use of US-built, US-manned and US-operated vessels.
While project owners can use specialised turbine vessels, at present built predominantly in Europe or South Korea, components must be brought out on American barges and then moved to their European counterparts, thus increasing the risk of component or third-party damage.
Generally speaking, however, the US has a well publicised hurricane risk, while Taiwan, a zone with especially high winds and favourable governmental policies, is at risk from typhoons as well as earthquakes.
Liquefaction can follow an earthquake, and there is a risk of serious damage to foundations should this occur. Insurers have to be wary of such events: in 2018, the energy insurance markets were hit hard by Nat Cat and suffered losses across the board. It is vital for insurers not to compromise on the pricing of Nat Cat policies in emerging markets, and to anticipate years of higher than expected damage from natural disasters.
The second general risk that emerging markets often face is contractor risk: in areas where offshore wind has not previously been established, local expertise for offshore developments may be lacking. This can lead to higher levels of component damage and inefficient projects – though it should be noted that these problems can be expected to diminish as regions pick up a local pool of experience.
That said, overall, the risks of offshore wind are broadly similar across all regions: regardless of situation, cable risk is the largest contributor to claims, though the risk may be exacerbated by local contractor risk.
For all that Nat Cat is a risk to be considered and taken seriously, as recent typhoon-proof turbines from Siemens suggest, wind turbines are increasingly being engineered with Nat Cat in mind. Onshore and offshore projects both demonstrate a significantly lower level of claims from Nat Cat compared with solar projects, for example.
Risk in future developments
Predicting the future is a hard task, as the energy insurers who lost out to Nat Cat this year can attest to. For every new technology that may reduce risk – fibre optic cables, for example – there may be accompanying problems. While time may help to settle risk factors and identify problems, in an industry that is constantly evolving to respond to new technologies and push down the levellised cost of energy there is not often time to wait.
The best way for investors to tackle risk factors is to rely on an insurer familiar with regional projects. An insurer who knows the region, contractors and developers can make more accurate predictions about risk and not lose out due to an unexpected turbine slippage problem or a surprise typhoon.
Computational models of risk factors may help determine overall risk but should be supported by on-the-ground knowledge.
This year’s losses arose in large part due to projects being built on the edge of risk zones, where projects are cheaper to insure – but subject to increased risks from the neighbouring zone. If insurers know the area well, they can be sure not to under or over-insure based upon computational models that may not capture the full picture.
Beyond that, investors can take advantage of digital advances. As offshore wind generates more capital, more innovative digital solutions are being developed, such as “digital twins”, digital models of turbines based on live data that can map out future scenarios and predict turbine damage or failure before it happens. These advances in predictive maintenance help to reduce losses from turbine failure and the resulting repair costs.
Finally, an honourable mention should go to cyber insurance. As offshore wind grows and takes up digital solutions, the industry should be careful to insure against cyber-attack, which can result in large losses from operational downtime or turbines being held hostage by malicious hackers.
Look to your cables
All in all, insuring offshore wind is a tricky business: not only are there large losses from cable lay and the difficulty of identifying cable issues, but these claims are accompanied by a whole host of extra issues, from foundation slippage to Nat Cat risk.
Nonetheless, offshore wind is a growing industry and one that is well-worth the attention of investors in the coming years, whether fixed or floating. In Europe, offshore wind grew by 25% in 2017. Right now, over 4,000 offshore turbines are spinning in Europe alone, harnessing the energy of the wind – and that number is only going to grow. As insurers, it is our duty to make sure it does so safely, and that wind can continue to provide clean energy in promising markets worldwide.