Former US Defence Secretary Donald Rumsfeld once famously said: “We know there are known knowns and we also know there are known unknowns; that is to say we know there are some things we do not know.’
Renewable Energy projects, regardless of technology - Wind, Solar or Battery Storage - have project lifecycles populated with dozens of known unknown risks. The job of a good risk advisor is to anticipate and tease out the known and unknown risks and avoid or reduce the risk of them occurring or mitigate the impact when they do occur. This forensic analysis and quantification will have a direct impact on both the insurability and bankability of the project.
How reliable are existing renewable energy projects? With many countries now producing close to 50% of their electricity from renewables and therefore becoming increasingly dependent on this relatively new industry, there is quite naturally a focus on the reliability of existing renewable energy projects as well as the introduction of new projects coming onstream. On December 8, 2019, UK wind farms generated more than 16 GW of power for the first time; wind supplied 43.7% of electricity, nuclear 20,5%, gas 12.8%, biomass 7,9% while 7.4% came from imports1. The extra power meant the National Grid paid some households to use electricity, as it was cheaper than paying the operators of wind turbines to stop them generating. The energy mix is changing, and the current climate movement will only further encourage the renewable energy contribution
to increase. Currently there at nearly 7,000 UK independent commercial-scale projects in operation2.
As the global renewable energy industry matures, the insurance market has not unsurprisingly felt the impact of increased volume of claims, and magnitude of losses. Bigger projects, greater sums insured, larger targets for natural catastrophe perils (for example, the $80m hailstorm loss to a solar farm in West Texas in 2019) have increased the risk to projects and insurers.
Specialist renewable energy risk advisors guide and advise developers and contractors alike though the phases of a project, helpfully summarised in Figure 1 below. The project is challenged at each anticipated phase to consider what the known risks are, as well as the potential unknowns.
The key question To date, there have been certain risks, such as long-term liabilities and potential legal challenges, that project owners have simply accepted, or felt obliged to accept onto their balance sheet as they were unaware of an alternative approach. However, over the last five years, experienced project owners and their legal and financial advisors have posed the question:
“Is there anything that insurance could do to avoid these types of risk and or transfer them away from the balance sheet?”
Banks and lenders have in fact eagerly sought to reduce these known risks on projects and begun to engage with the insurance sector. Whilst the insurance market has been dramatically hardening in the last 12 months, the Lloyd’s and company insurance markets have remained incredibly receptive and innovative when it comes to developing new risk solutions for this fast maturing sector.
Legal challenges, such as Judicial Reviews to planning applications/permits, have increasingly been seen in the UK, France, Germany, Sweden and Ireland as projects continue to attract divided sentiment amongst the population. For example, Sweden requires an “environmental permit” which can expire, so fresh permits must be applied for and the application processes can be lengthy. This protracted process can lead to more uncertainty over potential challenges that could be mounted, so seeking protections against future challenges would provide a level of certainty.
Third party rights and title ownership discrepancies need to be fully considered at the earliest possible stage in the project lifecycle process. Project principals and lenders need to identify who are likely to mount a challenge; recent experience shows that this can range from individual third parties and landowners to environmental groups. In certain territories, ‘serial challengers’ have caused considerable delays and financial loss to renewable energy projects.
Known potential losses If there were a challenge to a wind farm or solar park project, then owners could find themselves incurring considerable legal/professional costs. The project CAPEX could be threatened, and the project might conceivably and quite likely incur a loss of asset value. These challenges and delays will inevitably cause a loss of revenue which would not be traditionally protected by Property Damage and Business Interruption insurance, as there has been no physical damage.
So, to counter these known unknowns, a number of risk solutions have been tailored to protect against these increased exposure in the Renewable Energy sector. The following are some examples of just such challenges that have been posed to risk advisors and the innovative risk solutions designed to mitigate the “known unknowns”.
Country: Sweden Asset: Pre-construction wind farm Insured risk: Third party legal challenge to the extension of an Environmental Permit to facilitate the construction of the wind farm. Threat to the Developer: The team ran a downside scenario of a five-month delay to one of the projects. A five-month delay would cause 19/41 turbines to miss the permit deadline resulting in an economic loss of €50M. Risk solution: Indemnity to protect the Operator against any delays caused by a third-party legal challenge to the Environmental Permit. Key losses covered:
Country: Ireland Asset: Operational wind farm Insured risk: Blade diameter of the as built turbine is different from that for which planning permission was first granted under planning permission Risk solution: Indemnity to protect the Operator and Lender that any court of competent jurisdiction make an Order requiring the turbines to cease operating Key losses covered:
Country: UK Asset: Pre-construction wind farm Issue: The landlord had granted an easement for the project to lay a grid connection cable over his property, the easement entitled the landlord to require the project to move the cable if required, for example by a change of use or development of the land. The investor buying the project was unable to complete the purchase with this “known unknown” liability in play Insured risk: The costs associated with having to re-route the cable connecting the project to the grid Risk solution: A bespoke Defective Title insurance policy to cover the Lift and Shift indemnity agreement, with a limit of £1 million rising to £2 million over the period of the lease Key losses covered:
Country: UK Asset: Operational wind farm Issue: Long term PCG on the Balance Sheet for an Indemnity to a Statutory Provider Insured risk: In order to carry out works to construct an access road install cable ducts, lay and use cabling in the vicinity of a gas pipeline, the Wind Farm entered into a Deed of Consent and Waiver with the Statutory Provider to provide an indemnity with a limit of £10M should the pipeline be damaged. A Parent Company Guarantee was also required from the owner to the Project. Risk solution: A bespoke policy was provided, for the term of the lease, to protect the Project against any loss following damage and a demand being made under the PCG. This enabled the investor to proceed with the purchase of the Project Key losses covered:
Donald Rumsfeld’s coining of the phrase “known unknowns” has proved a useful trigger to discuss the key risks of a renewable energy project. This should be done at the earliest possible opportunity, ideally during the pre-planning phase. Good risk intermediaries have demonstrated their ability to help de-risk many challenging projects, including using the above innovative risk solutions to ensure their bankability and long-term economic viability. What’s exciting is that a number of project opportunities for developer and investors could come back into play if such long-term liabilities can be removed - whether it be through Asset Protection, Defective Title Liability, Judicial Review policies or Legal Liability Risks, all these solutions protect projects against known and unknown risk in the long term.
Adam Piper is an Account Director, Renewable Energy GB, Willis Towers Watson.
1 https://www.energylivenews.com/2019/12/10/uk-hits-renewable-energy-record-as-wind-shatters-16gw-threshold/ 2 https://www.edie.net/news/10/In-numbers--Charting-the-rapid-growth-of-renewable-energy-in-the-UK/