Owners of renewable projects – batteries in particular – will have a better chance of managing the price they pay for insurance if they take a team approach.
What are the risks to renewables? That’s easy: they are clouds for solar and stillness for wind. At least, that’s how energy users might see things. For owners of clean energy plants and the storage facilities that will firm their erratic generation, the list of things that can wrong is much, much longer. They can offset some of the negative impacts from the unknown with good insurance cover, of course, but as the sector matures and grows at a rapid pace it is the insurers who are experiencing rude shocks. When that happens, premiums rise.
“So many financial models are being blown by poor estimates,” says BMS Risk Solutions client director construction and energy Ben Humphries. “They are not just a little bit out; in a lot of cases they are materially out.”
To give an example of how badly things can go wrong for an insurer, Humphries recalls a renewables project where a premium of a couple of hundred thousand precluded, a few years later, a multimillion-dollar claim settlement. “People think of renewables, particularly solar PV, as a benign technology. But from the insurance claims perspective it is just not the case,” he says.
As an insurance broker, BMS Risk Solutions will also provide developers and contractors with forecasts on premiums and “deductibles” (or excess, to apply the family car analogy) to use in budgeting models. Lately they’ve been giving clients the bad news that insurance estimates plugged into models a few years ago by well-meaning accountants or project teams may, in some cases, need to be doubled or tripled. “It’s not a small line item in terms of a project expense these days.”
It’s busy down here
The Australian clean energy sector is bristling with activity, but not all the participants have learnt about risk the hard way. Often it’s the sophisticated big players with global assets under their belts who will understand the value in paying for third-party experts. Also, the insurance market has experienced its own growth spurt. “The global insurance market has hardened considerably over the past 24 to 36 months,” says BMS Risk Solutions head of energy Australia Richard Nunny, pointing to a period where competition among insurers saw them underestimate premiums required to cover subsequent claims.
“It got to a stage where there had to be some material changes for insurers to be around tomorrow, to build for the future. They had to adjust their premiums, otherwise they just weren’t making money – especially in renewable energy.”
As technology becomes larger and more complex, with skyscraping wind turbines and bifacial PV modules on tracking systems, claims are also harder to anticipate. “Technology itself is a risk,” says Nunny, where a lot of gear covered by insurances has never been proven to anywhere near the manufacturers’ lifetime estimates.
And then there is storage. Without a conclusive report that pinpoints the cause of the fire that destroyed two Tesla Megapacks at Neoen’s Victorian Big Battery in July, it’s fair to say the event made global news. “There’s a lot of storage in the pipeline,” Nunny says, “but it’s still a relatively new sector.”
It takes teamwork
In March, BMS partnered with the renewable energy team at insurer AXIS Capital to release a report on best practice in the insurance of lithium-ion battery systems, four months before the fire at Neoen’s project in Moorabool, near Geelong (pictured). In the report, Nunny and Humphries predicted insurance costs for renewable energy projects including lithium-ion battery energy storage systems are likely to rise.
The solution, they wrote, is smart risk assessment from the very earliest stages of a project’s development. “Developers and operators need to develop best practice processes in risk management to ensure their insurers can develop the right policy and premium structure to protect their facility,” the report said.
Prospective insurers will need to understand how a battery system is constructed, the protocol of its battery management system, how the risk of a thermal runaway event is minimised and whether a battery system adheres to international certifications around fire safety as well as government standards and regulations. All risks about the exposures to natural catastrophes, grid connection and co-location with generation assets should also be on the table.
If extra investment in risk assessment looks unattractive, owners should know it is likely to be re-couped in lower premiums and deductibles over the lifecycle of the project. “Insurers are not trying to avoid paying valid claims, but they need the right information to be able to construct the best coverage and premium structure,” Nunny says.
“Developers and operators who have carried out risk engineering surveys, implemented risk improvement recommendations and shared this information with insurers to support underwriting submissions have achieved more competitive terms and conditions.”
Cost you can control
There is no project budgeting model in the world that can identify everything that can go wrong. During the operational lifetime of an asset insurance costs may amount to 2-4% of revenues, perhaps not far behind O&M costs. “Anything you can do that’s going to have a flow-on effect over 30 years is going to affect the viability of the project,” Humphries says.
Insurers are not backing away from the sector. Although there has been some calamitous mismatching of premiums and claims over the recent past, developers should know the major insurers will have a far deeper pool of data to draw on than they will. Developers, owners or operators who engage with insurers, via an experienced consultant, can nut out the engineering of a project and work together to spot weak points that could lead to claims.
“Insurers want to respond to catastrophic events that are unforeseen,” Nunny says, and not “those niggly little events – those attritional claims – that could have been avoided”.
Any project may include multiple layers of insurance allocated to various parties, being owner, EPC contractor and, to some extent, sub-contractors to the EPC. Contractor error is a major contributor to claims, Nunny says, and insurers are looking for project owners that have partnerships with top-tier firms. Such are the unknowns, however, that insurers will always experience nasty surprises in parts of their portfolios. “The reality is, you can build the best project in the market and it can still have a loss.”
Lightning strikes at Lal Lal Wind Farm, a ferocious “willy willy” storm tearing through the Oakey 2 Solar Farm (main picture), a fallen blade at Dundonnell Wind Farm, the Victorian Big Battery fire, bearing failures, cabling issues, stressed transformers, a court case over noise from an operating wind farm and a couple of other events that shall remain off the record, only one thing in life is certain for owners of wind, solar and storage assets: when you least expect it…