Collaboration critical if onshore wind industry is to reach potential

Axis’ Peter Fitzsimmons and Becky Nace examine the complexities of insuring onshore wind…

While the renewable energy market continues its strong growth trajectory, it is not without challenges, particularly in onshore wind. In recent years a growing number of leading original equipment manufacturers (OEMs) have struggled to make their onshore business profitable.

One such manufacturer, Siemens Gamesa, named a new CEO as a result of “significant challenges” in its onshore business, while other manufacturers including Vestas and Nordex announced downgrades in their financial guidance.

For many insurers these issues have not come as a surprise. Issues with contractor arrangements, changes in technology, climate change and – for the foreseeable future – supply chain disruptions make onshore wind a particularly complex area within the renewable energy sector.

Onshore wind construction has been particularly challenging from a risk perspective with year-on-year hardening of rates within the insurance market continuing into 2022.

Unintended consequences

Historically, lenders have pushed for single owner-controlled insurance policies.

This arrangement ensures all parties are covered by a single policy and that there is one primary policy under which to file a claim.

This arrangement also avoids construction delays that may be caused by the parties taking time to decide under whose policy to file a claim. As the industry has progressed, margins have decreased for contractors as they receive lower fees and work to tighter deadlines.

As a result, this is having a knock-on effect on the quality of some of the work being delivered. As the pool of established contractors is limited, there are few consequences for contractors who perform poorly under this system.

With contractors added to the insured’s policy, insurers pay for mistakes made by contractors. Inevitably, this results in tightened terms and increasing rates for the insured. In some cases, it is possible that the insured first learns of a claim when the insurer provides the insured with notice of an investigation.

This situation is often exacerbated by contractors bringing in less experienced subcontractors to meet these tighter deadlines. Unfortunately, instances of contractors working in suboptimal conditions and making simple errors that lead to claims have become all too frequent.

To add to this, when developers order wind turbine generators (WTGs) from an OEM, there is normally an insurance policy already in place for the delivery and construction of the assets.

Lenders are therefore asking developers to purchase a second policy which may cover similar aspects of the policy supplied by the OEM.

Because the contractors may claim under the insured’s policy, insurers may consider offering a difference in conditions policy which wraps around the OEM policy, or any other contractor policies, to enable the developer to manage or reduce the premiums they pay and avoid doubling up.

A lack of separation between the project owner and the contractor may lead insurers to re-evaluate coverage based on increased exposure. In some cases, insurers may seek oversight from a third-party monitoring service to monitor a project’s progress and identify possible issues.

Claims trends

The challenges emerging in the onshore wind construction market are highlighted in our claims data, which suggests that during the last five years, construction all risks (CAR) policies have been 50 percent more likely than operations all risks (OAR) policies to suffer a claim.

In addition, the average CAR claim is nearly double the average OAR claim. Technological progress has also added complexity to the market. Over time the size of WTGs has increased, providing greater economies of scale.

This is a key selling point for project owners, as larger turbines reduce the cost of the energy produced. Conversely, the larger the turbine, the larger the cost of any individual claim. As an example, the increase in the size of wind turbines has meant a subsequent increase in the length of turbine blades.

Newer blades can span more than 100 metres and often require specialist equipment for construction or replacement. Not having spare blades onsite and/or a delay in finding the specialist equipment necessary to host the blades can severely increase the size of a claim.

Collaboration

As the former Siemens Gamesa CEO departed the company he stated that OEMs will “not accept the risk that the OEMs used to accept any more” – this message has undoubtedly rung loud and clear with many in the insurance industry, yet there is more work to be done.

While there have been many improvements in the onshore wind environment, closer collaboration between different stakeholders in the industry will strengthen its long-term prospects.

As the demand for onshore wind projects increases, many of the same issues will remain: How do the contracts mesh between insureds and contractors? Is there enough specialist equipment available to complete the increasing number of projects? Are these projects built for future weather conditions?

Managing risk effectively for onshore wind projects requires all stakeholders to communicate regularly and to share their knowledge so that projects are built on time. For the industry to reach its potential, collaboration is key.

Peter Fitzsimmons is head of international onshore at Axis London and Becky Nace is senior underwriter at Axis