PO001

Hammer comes down on the lowest bid ... and the highest risk?...and how to insure?

Ralf Skowronnek
Marsh GmbH, Hamburg, Germany

Abstract

Ralf Skowronnek, Chief Engineer and Head of Offshore Wind Practice Europe at Risk Adviser and Insurance Broker MARSH, explains case studies and challenges he experienced with recent offshore wind tenders and shares ideas on insurance cost reductions without exposing projects to significant risks. Ralf has performed similar jobs for approximately 12 Gigawatt offshore wind during the last 10 years. What makes the present environment of governmental tenders so challenging is the requirement imposed on the bidders to bid at their lowest energy price for a project which will start to operate earliest in 3 years following the bidding date with technology at significantly higher performance rates than are existing today (8 to 10 Megawatt (MW) turbines), on new foundations enabling the projects to install their wind farms in deeper waters and at a low long term insurance premium level. How can this be achieved?

Will we be able to install wind farms delivering electricity at a price around 50 EUR/MW and will we find insurers willing to cover this risk also during the operational phase? Of course we will. However, the question that presents itself and that we are being regularly asked by project managers responsible for the bids is: At what premium level will we be able to achieve a sufficient insurance coverage setup?

Ralf will discuss how to manage many of these challenges from the early beginning by explaining a simple methodology of risk analysis and mitigation with the aim to recommend the minimum necessary insurance coverage setup.

Method

In risk assessment workshops that we organize for our clients, we deliver the methodology (risk matrix drafts) and five typical risk examples already implemented in the matrix naming the event, impact on the project (property damage, project delay-in-start-up or project downtime), the resulting amount representing the loss of revenue, potential mitigation by technological devices, contractual setup or insurance, including the respective type of insurance if it is placed with a common limit, and deductible or time excess. The project team (technicians, legal, commercial) then provide additional risk examples they are seeing relevant for this individual project. As a result of the most workshops a risk matrix with 50 to 100 main risks is produced and analyzed. Ralf will briefly describe this methodology during his presentation.

Results

Between 70 to 80% of project delays or downtimes are not insurable. On the other hand, an insurable Delay-in-Start-Up (DSU) risk can easily result in losses reaching EUR 500 Mio. arising out of natural catastrophe, anchor damage to export cable, total loss of installation vessel or of substation during tow out or installation process as well as during operation. But even though they can be insured by a combined offshore wind insurance, most large companies decide against it because the premium is too high. Ralf will demonstrate that a significant part of premium can be saved by combining Construction-All-Risk (CAR) with DSU Insurance using a suitable level of limits and deductibles resulting in a surprisingly low additional DSU premium. Same applies during the operational phase.

Conclusions

In the wake of EUR 54.40 per MWh at which the hammer came down for Borssele 3&4, there might not be too much space left for an infamously high premium to cover a potential EUR 500 Mio. loss resulting from force majeure or natural catastrophe. Yet our analysis shows that the Delay-in-Start-Up or Business Interruption risks might easily be insured at a low price if the coverage is designed to cover the highest project risks probed together with the project team and insured at a sensible commercial balance among the available types of coverage. As a result, the industry including contractors and suppliers will benefit from having a project which is commercially better secured, comprising the balance sheet of the project owner and its shareholders.

Objectives

Delegates will be inevitably motivated to ask themselves if at least their largest project risks should be sufficiently insured, be it with a certain limit or a higher deductible, rather than excluding them altogether and thus assuming a major loss exposure with potentially very harmful and costly impact on the project. Listening to the innovative scenarios and watching the examples gathered by the industry expert, they might start to consider that it might actually be far less expensive than expected, surprisingly also in the wake of auction results such as we witnessed with Borssele 3&4. No one can claim to have seen it all, however, a risk and insurance expert with 12GW offshore wind experience worldwide can certainly open new horizons for future industry talks.