- Email: [email protected]
Mitigating risk
About: Stephen Morris is a power and energy underwriting manager at HSB Engineering. Feature article
Mitigating risk HSB Engineering’s Stephen Morris examines the many risk factors which have to be considered when financing and executing renewable energy projects.
T
HE IMPLEMENTATION of renewable technologies to generate power has increased at an exponential rate over the past decade. Research conducted by the Massachusetts Institute of Technology has shown for the first time in history, patents for innovations in renewable energy are now rising at a faster rate than patents for technology based in fossil fuels. Investment in renewable technologies has increased across the globe in both established and new territories. Whilst OECD countries still account for the majority of renewable energy production, over the past six years non OECD growth has exceeded OECD growth in percentage terms. Growth in all types of renewable technologies is already being seen in South America, Turkey, Eastern Europe, Southeast Asia, Southern Africa and China. In the Middle East, Africa and parts of Asia in particular, there is increasing interest in photovoltaic installations.
22
March/April 2014 | Renewable Energy Focus
Online: renewableenergyfocus.com Latest analysis from PA Consulting’s Energy Investment Map http://ow.ly/2EigBA Mainstream Renewable Power announces slew of international utility-scale deals http://ow.ly/2DUVd9 Air traffic services company reaches accord with two major wind energy developers http://ow.ly/2E3fUb
Feature article
Wind farms are often erected in remote locations, making it difficult for trucks to maneuver along narrow roads. Planning permission may be required to extend and widen roads for the duration of the project. Photo courtesy of Shutterstock.com/Spirit of America.
Financing an onshore renewable energy project has unique complexities. By the very nature of the technologies involved, there are numerous risk factors which have to be considered from early phases of planning, through construction to final operation.
Planning a project Each installation project offers different risk challenges from environmental hazards, natural catastrophes, planning, to equipment damage and breakdown and loss of profits. Involving insurers and their engineers at the start of a renewable energy installation is an essential component in the risk management process.
Natural hazards, climate, etc In any renewable energy project, it may be tempting to build an installation on undeveloped land without consideration being given to why the land is available. In addition, the natural environment and weather conditions, the suitability of the technology to withstand those conditions, and the risk-reducing factors which can
be engineered into the design should all be taken into account. For example, wind turbines must be suitable for average wind speed, turbulence values and extreme gust levels. Working time on site can be restricted by the climate and exposure to the elements. In some regions, winters are too harsh for work to continue. This should be given due attention in the planning stage along with measures to preserve partially built equipment and material on site during site lay-off periods. Given the size and weight of modern wind turbines, it is vital that the geotechnical conditions are appropriate and the foundation design is reliable. There are numerous examples of inadequate foundations leading to collapse, such as wind turbines being erected over mining shafts or on unstable soil. Foundation design should be undertaken by a qualified structural engineer.
Contractors, site access, equipment Growth in renewable energy has prompted contractors with little
experience in this sector to enter the market. Engaging the services of an experienced contractor with strong project management skills and previous experience in similar renewable energy projects is therefore crucial to ensure its success. Access to the site is an important consideration during the planning stage. Wind farms are often erected in remote locations, making it difficult for trucks to maneuver along narrow roads. Planning permission may be required to extend and widen roads for the duration of the project, and it may be necessary to remove overhead cables, traffic lights and other street furniture on the route. Once the project has been completed, this infrastructure needs to be restored to its previous state. For remote construction projects where infrastructure changes were required, the cost, time factor in obtaining planning permission and reconstruction of access roads will need to be factored into any revisit to the site for maintenance, breakdown and damage repair.
March/April 2014 | Renewable Energy Focus
23
Feature article
Having the right construction equipment on hand for the project is also essential. For instance, at least one crane is needed to erect a wind farm. It is therefore recommended to plan in advance the availability of appropriate cranes of suitable size, as well as arrange for replacements in the event of any problems. In addition, the operation of cranes and the provision of hard standing are additional things to consider in the planning stage.
Constructing the project Once a project has started, additional risk factors need to be considered to ensure successful completion of the installation. Among them: Site security: Proper site security is an important issue for all renewable energy installations. Theft, particularly of copper cables and other metal components, is a concern, and some sites may be vulnerable to vandalism and arson. Good site security, monitoring systems and ‘just-in-time’ delivery of materials to the site all help to reduce these security exposures. Where possible, cables should be buried underground rather than run on the surface between installations. This will help reduce the incidence of theft. Testing and commissioning: Following installation, the machinery is tested and commissioned. During this phase the risks and exposures can be reduced through the use of proven machinery and techniques, and by selecting a competent contractor. At this stage of the project, it is important that appropriate insurance protection is in place and risk engineers with knowledge and experience of the technology can advise on the insurability of the equipment being considered. Once an installation begins to operate and produce power, construction-phase exposures such as foundation design and site access are superseded by new exposures such as breakdown, fire and business interruption risks. Fire risks: Fire, although infrequent, usually causes extensive damage and becomes a much greater hazard for all renewable energy
24
March/April 2014 | Renewable Energy Focus
The growth in renewable energy has prompted contractors with little experience in this sector to enter the market. installations once testing and commission commences. Biomass installations in particular face even greater risk from fires and explosions. Fires in these technologies generally start in hydraulics, flumes, filters, conveyors or gearboxes, but can also start in fuel sources as a result of spontaneous combustion. Fire detection and suppression systems are important tools for combating the risk of fire. Having well designed and installed systems together with appropriate power back up, such as onsite generators, is an essential part of mitigating fire risks. Note: A full fire risk assessment may be necessary in accordance with local regulatory requirements to ensure that a suitable site specific ‘Fire Safety Plan’ is created.
Operating an installation After successful construction and commissioning the installation remains at risk from damage caused by fire, theft and natural hazards. In addition damage caused by breakdown now also needs to be considered. Equipment breakdown: According to HSB Engineering Insurance, 69% of losses involving wind turbines relate to mechanical and electrical breakdown, with the most common failures occurring in transformers and gearboxes. Transformer breakdowns may result from overloading individual export transformers. From a business interruption point of view, housing multiple export transformers is one of the best ways to reduce this risk. Warranties have an important role to play in new installations. If a warranty is still in place, it can help protect against the material cost of equipment failure, but it does not usually afford protection against business interruption. When a breakdown occurs, sourcing the correct parts can
sometimes be difficult. A robust parts inventory needs to be designed around a good risk assessment to ensure that the correct replacement parts are available quickly in areas where breakdowns are common. For example, access to spare parts for high-risk items such as transformers minimises downtime. All machinery and equipment requires maintenance. Having a robust preventative maintenance programme in place can help mitigate the risk of equipment breakdown. Monitoring equipment with defect notification systems can also play a key role in detecting potential problems early to eliminate or mitigate potential damages.
Role of insurers Across the world, new renewable energy capacity is coming on-line every day. Significant future investments are planned and growth will continue as governments strive to meet their renewable energy commitments and diversify from more established technologies. It is inevitable that with an increased focus on renewable energy, these types of projects will become more attractive to investors. With each installation bringing different risk challenges, access to specialist knowledge on risk management can help control and reduce potential risk exposures and aid investment decisions. Collaboration with clients is the key to a successful partnership, and insurers can add value by working with installers, operators and risk managers to control and mitigate risk from the construction phase right through to operation. We believe that insurers play an essential role and are responding to the challenge of offering insurance products for renewable energy technologies that cover the evolving risks.
Mitigating risk HSB Engineering’s Stephen Morris examines the many risk factors which have to be considered when financing and executing renewable energy projects.
T
HE IMPLEMENTATION of renewable technologies to generate power has increased at an exponential rate over the past decade. Research conducted by the Massachusetts Institute of Technology has shown for the first time in history, patents for innovations in renewable energy are now rising at a faster rate than patents for technology based in fossil fuels. Investment in renewable technologies has increased across the globe in both established and new territories. Whilst OECD countries still account for the majority of renewable energy production, over the past six years non OECD growth has exceeded OECD growth in percentage terms. Growth in all types of renewable technologies is already being seen in South America, Turkey, Eastern Europe, Southeast Asia, Southern Africa and China. In the Middle East, Africa and parts of Asia in particular, there is increasing interest in photovoltaic installations.
22
March/April 2014 | Renewable Energy Focus
Online: renewableenergyfocus.com Latest analysis from PA Consulting’s Energy Investment Map http://ow.ly/2EigBA Mainstream Renewable Power announces slew of international utility-scale deals http://ow.ly/2DUVd9 Air traffic services company reaches accord with two major wind energy developers http://ow.ly/2E3fUb
Feature article
Wind farms are often erected in remote locations, making it difficult for trucks to maneuver along narrow roads. Planning permission may be required to extend and widen roads for the duration of the project. Photo courtesy of Shutterstock.com/Spirit of America.
Financing an onshore renewable energy project has unique complexities. By the very nature of the technologies involved, there are numerous risk factors which have to be considered from early phases of planning, through construction to final operation.
Planning a project Each installation project offers different risk challenges from environmental hazards, natural catastrophes, planning, to equipment damage and breakdown and loss of profits. Involving insurers and their engineers at the start of a renewable energy installation is an essential component in the risk management process.
Natural hazards, climate, etc In any renewable energy project, it may be tempting to build an installation on undeveloped land without consideration being given to why the land is available. In addition, the natural environment and weather conditions, the suitability of the technology to withstand those conditions, and the risk-reducing factors which can
be engineered into the design should all be taken into account. For example, wind turbines must be suitable for average wind speed, turbulence values and extreme gust levels. Working time on site can be restricted by the climate and exposure to the elements. In some regions, winters are too harsh for work to continue. This should be given due attention in the planning stage along with measures to preserve partially built equipment and material on site during site lay-off periods. Given the size and weight of modern wind turbines, it is vital that the geotechnical conditions are appropriate and the foundation design is reliable. There are numerous examples of inadequate foundations leading to collapse, such as wind turbines being erected over mining shafts or on unstable soil. Foundation design should be undertaken by a qualified structural engineer.
Contractors, site access, equipment Growth in renewable energy has prompted contractors with little
experience in this sector to enter the market. Engaging the services of an experienced contractor with strong project management skills and previous experience in similar renewable energy projects is therefore crucial to ensure its success. Access to the site is an important consideration during the planning stage. Wind farms are often erected in remote locations, making it difficult for trucks to maneuver along narrow roads. Planning permission may be required to extend and widen roads for the duration of the project, and it may be necessary to remove overhead cables, traffic lights and other street furniture on the route. Once the project has been completed, this infrastructure needs to be restored to its previous state. For remote construction projects where infrastructure changes were required, the cost, time factor in obtaining planning permission and reconstruction of access roads will need to be factored into any revisit to the site for maintenance, breakdown and damage repair.
March/April 2014 | Renewable Energy Focus
23
Feature article
Having the right construction equipment on hand for the project is also essential. For instance, at least one crane is needed to erect a wind farm. It is therefore recommended to plan in advance the availability of appropriate cranes of suitable size, as well as arrange for replacements in the event of any problems. In addition, the operation of cranes and the provision of hard standing are additional things to consider in the planning stage.
Constructing the project Once a project has started, additional risk factors need to be considered to ensure successful completion of the installation. Among them: Site security: Proper site security is an important issue for all renewable energy installations. Theft, particularly of copper cables and other metal components, is a concern, and some sites may be vulnerable to vandalism and arson. Good site security, monitoring systems and ‘just-in-time’ delivery of materials to the site all help to reduce these security exposures. Where possible, cables should be buried underground rather than run on the surface between installations. This will help reduce the incidence of theft. Testing and commissioning: Following installation, the machinery is tested and commissioned. During this phase the risks and exposures can be reduced through the use of proven machinery and techniques, and by selecting a competent contractor. At this stage of the project, it is important that appropriate insurance protection is in place and risk engineers with knowledge and experience of the technology can advise on the insurability of the equipment being considered. Once an installation begins to operate and produce power, construction-phase exposures such as foundation design and site access are superseded by new exposures such as breakdown, fire and business interruption risks. Fire risks: Fire, although infrequent, usually causes extensive damage and becomes a much greater hazard for all renewable energy
24
March/April 2014 | Renewable Energy Focus
The growth in renewable energy has prompted contractors with little experience in this sector to enter the market. installations once testing and commission commences. Biomass installations in particular face even greater risk from fires and explosions. Fires in these technologies generally start in hydraulics, flumes, filters, conveyors or gearboxes, but can also start in fuel sources as a result of spontaneous combustion. Fire detection and suppression systems are important tools for combating the risk of fire. Having well designed and installed systems together with appropriate power back up, such as onsite generators, is an essential part of mitigating fire risks. Note: A full fire risk assessment may be necessary in accordance with local regulatory requirements to ensure that a suitable site specific ‘Fire Safety Plan’ is created.
Operating an installation After successful construction and commissioning the installation remains at risk from damage caused by fire, theft and natural hazards. In addition damage caused by breakdown now also needs to be considered. Equipment breakdown: According to HSB Engineering Insurance, 69% of losses involving wind turbines relate to mechanical and electrical breakdown, with the most common failures occurring in transformers and gearboxes. Transformer breakdowns may result from overloading individual export transformers. From a business interruption point of view, housing multiple export transformers is one of the best ways to reduce this risk. Warranties have an important role to play in new installations. If a warranty is still in place, it can help protect against the material cost of equipment failure, but it does not usually afford protection against business interruption. When a breakdown occurs, sourcing the correct parts can
sometimes be difficult. A robust parts inventory needs to be designed around a good risk assessment to ensure that the correct replacement parts are available quickly in areas where breakdowns are common. For example, access to spare parts for high-risk items such as transformers minimises downtime. All machinery and equipment requires maintenance. Having a robust preventative maintenance programme in place can help mitigate the risk of equipment breakdown. Monitoring equipment with defect notification systems can also play a key role in detecting potential problems early to eliminate or mitigate potential damages.
Role of insurers Across the world, new renewable energy capacity is coming on-line every day. Significant future investments are planned and growth will continue as governments strive to meet their renewable energy commitments and diversify from more established technologies. It is inevitable that with an increased focus on renewable energy, these types of projects will become more attractive to investors. With each installation bringing different risk challenges, access to specialist knowledge on risk management can help control and reduce potential risk exposures and aid investment decisions. Collaboration with clients is the key to a successful partnership, and insurers can add value by working with installers, operators and risk managers to control and mitigate risk from the construction phase right through to operation. We believe that insurers play an essential role and are responding to the challenge of offering insurance products for renewable energy technologies that cover the evolving risks.