Several recent incidents show that relatively minor damage to renewable energy assets on a project site or other sites using comparable technology can result in the entire site being shut down for an extended period.
The reasons for this are entirely sensible – to accommodate a detailed investigation/root cause analysis and to evaluate a rectification program if required. The problem for project owners, financiers, Operations and Maintenance (O&M) contractors and pretty much everyone connected with the site is that revenue dries up, but financial commitments still need to be met.
Getting things back up and running can be problematic, and not helped by the remoteness of sites, which makes the length of downtime/non generation more prevalent. There are many examples impacting wind farms where a single issue has shut down the entire project, among them Canada’s TransAlta Renewables where a single tower collapsed at their Kent Hills site and the Dundonnell incident in Victoria, where a single blade detached, leading to a complete cessation of operations.
The impact can also be felt much more widely. A key example here is the Aldermyrberget turbine collapse in Sweden where a significant number of the V150 turbines manufactured by Vestas had to be taken offline across multiple sites using the same technology.
These incidents around the world have the potential to hugely impact renewable energy projects’ ability to manage risk.
From a pure diligence perspective, hypothetical loss scenarios can become a contentious point during contractual negotiation, particularly if the matter is not identified promptly (such as during the actual drafting of contracts). Additionally, definitions such as Force Majeure are frequently overlooked or deemed ‘low priority’ which can create a gulf between the intent and operation of this clause, particularly as parties commonly misunderstand the mechanics of a Force Majeure response.
In our experience of working on large renewable energy projects globally, financiers and other interested parties are typically reluctant to accept unqualified risk when assessing a potential project. This is exacerbated as issues with renewable energy projects attract increasing media attention, and claims issues arise in the market due to proliferation of assets. This leads to the insurance market adapting its risk appetite and pricing, as we have seen during the recent market hardening cycle.
From a project owner/O&M contractors’ perspective, traditional Property Damage and Business Interruption (PDBI) insurance is triggered by ‘physical damage’ to the insured project assets. Therefore, the project insurances would cover the repair/replacement of the damaged equipment (PD) and (if purchased) the operational revenue (BI) missed resulting from the damage to the insured asset.
However, what would not be covered by the PDBI policy is the revenue lost by non-generation by non-damaged assets as a result of the shutdown. In the situations noted above, where only one or two turbines are physically damaged, the quantum for non-insured revenue loss can be huge, depending on the length of time before the site can become operational again. The question has to be asked: who takes the exposure for lost revenue?
There are various ways to address this problem, via both risk transfer and risk retention. Our typical approach involves early engagement and proactive involvement with other diligence workstreams, supplemented by conducting project-specific quantitative assessments. This helps ensure that solutions are project specific and fit for purpose, rather than generic and, as such, parties are familiar and comfortable with where their assumed risk is positioned.
John leads our Renewable Energy team in Australia and New Zealand. He is responsible for advising Renewable Energy clients on risk and strategy during all phases of the project life cycle.
