The transition from the construction to the operational phase can be a rocky road for renewable energy developers, contractors, insurers and lenders. Beyond the technical challenges that exist – which are increasing as projects grow larger in size, complexity and overall construction time - the project development teams must manage the transfer of risk through various contractual agreements, set against the differing interests and motivation of the parties involved. The recent market hardening is adding to this challenge, with the emergence of a stricter and more disciplined insurance market. It is on this basis that in this article we will explore:
While the interests of the various parties may differ, the common goal is to ensure a seamless transition of risk to the parties that are best positioned to manage it. No one project is the same, but there are several common activities that occur which a project risk manager must factor into its development. Firstly, the timing of the various insurance policies. As the construction policies reach their natural expiry, they must be sufficiently aligned to expire on the correct date of handover. However, while they may expire on a general basis, they are in fact extended though their respective maintenance period to cover the contractor(s) making good any defects onsite. The maintenance period should be set to the longest defect notification period from when the construction cover ends, generally 12 or 24 months in the renewable energy industry. In parallel, the operational policies must then be ready to incept on this handover date to avoid a gap in cover. Next, projects need to recognise that the construction and operational policies may be provided by different insurance companies, in some cases entirely different markets. This is a challenge for the larger, more unique projects, whereby there may be many different insurers being managed to ensure a smooth process. However, a useful development is that several specialist insurers have the capability to write insurances on a seamless construction to first operational basis; these policy structures streamline matters significantly for all involved. Further, the parties must be aware that the operation of the insurance policies will differ from construction to operational. One prime example is for loss of revenue indemnity; the deductible (waiting period) for delay in start-up is measured as an aggregate figure, while the waiting period for Business Interruption is generally on an each and every occurrence basis. This is because for Delay in Start-Up, there is one date on which the loss of revenue can trigger, which is the commercial operations date. Finally, the above three key issues are being complicated by changes in the industry; due to the increased size of projects, it is now quite common practice for there to be phased handovers (also known as sectional completion) and even periods of early operation before the formal handover.
With general complexity growing, COVID-19 has added to project woes. For instance, and this has been very apparent during 2020, projects are now often facing unexpecting delays. Projects may find themselves at 95% complete for several weeks pending relevant approvals; during this time, the project insurances must be extended, and operational insurers kept ready should the situation change quickly to ensure cover attaches correctly. If an ever-changing insurance market is also taken into account, this becomes a challenge to keep terms open, unless for instance a client can pre-bind the cover or have a seamless construction to operational policy in place.
The timing issue is recently being exacerbated where in some instances, insurers have been reluctant to extend cover at existing terms, especially those long-term projects which have not felt the changes in the insurance market during the last 18-24 months. This generally does take the form of a premium rate increase over and above a pro-rata basis, and this becomes a greater change if other terms and conditions must be amended.
The different types of handover are further challenging the way in which policies need to respond. If the system is brought into early operation (outside of testing and commissioning) then the construction policy section sometimes will respond, however this is not always the case, particularly for Machinery Breakdown. If the wording does not respond, an extension is required to accommodate the temporary Machinery Breakdown risk within the construction phase. With Solar, the additional export risk is minimal; broadly, for relatively short periods, an additional cost would not be anticipated; however, for Wind the additional risk is sufficiently material to warrant an additional premium. The early operations Business Interruption is another extension of a construction policy that again requires careful drafting to ensure the correct policy response.
Finally, when a project does not benefit from the same insurers underwriting both the construction and operational phases, there may be instances of claim disputes where they do not agree on the root cause or the timeline of the loss.
One of the most straightforward means of simplifying this process is to put in place a seamless construction to operational placement; however, this is not always going to be possible, certainly for the larger and more complex renewable energy projects. The following areas generally consist of what the market would seek to understand to best address this handover challenge1:
In the face of a challenging insurance market and at a crucial time for any project, risk managers should work with an advisor that understands both the construction and operational insurances. Then they should engage with this advisor at the earliest opportunity, so that they can adequately understand the situation and the risk manager’s issues. Only then can they develop a solution with the market that best fits individual risk manager needs.
Myles Milner is an Account Director in the Renewable Energy division at Willis Towers Watson in London. Myles.Milner@WillisTowersWatson.com
1 IMIA Working Group Paper 115 (19), Construction to Operational Insurance https://www.imia.com/wp-content/uploads/2020/02/IMIA-WGP-115-19-Construction-to-Operational-Insurance.pdf
