GCube Insurance services, Inc.
Newport Beach, California
The insurance market thought it had a bad 12 months with Australian fires and floods, plus the New Zealand Earthquake. Then Japan happened. The world is still reeling from the horrific damage and loss of life due to the March earthquake and tsunami. Governments, businesses, nuclear-plant operators, and renewable-energy companies are reviewing the risk profiles and models now associated with catastrophe losses. Meanwhile, insurers—and perhaps more importantly the global reinsurance market—are undertaking in-depth reviews of their exposure to loss from natural disasters and asking: How could we get it so wrong, again? It seems an appropriate time to look at how these events may affect modern grid-connected wind farms.
Windstorm: hurricanes, typhoons, and cyclones
Contrary to popular belief, average wind speeds along coastal areas in many parts of the world, particularly the U.S. Gulf Coast, are often lower than in inland areas. As a result, most wind farms have been built away from coastlines. However, turbines have steadily improved with new designs letting them capture more energy from low wind regimes than previously possible. This makes coastal development an increasingly attractive alternative, yet also increases turbine exposure to hurricane damage.
Project developers are looking closely at sites such as the U.S. Gulf and East Coast, the Caribbean, Philippines, Taiwan, Pakistan other parts of the Far East. Insurers classify all these locations as High-Risk Zones for the peril of windstorm and other national catastrophe, “Nat Cat,” events such as earthquake and flood. As a result, insurers usually establish a sublimit of liability on their coverage based on the likelihood of events happening over a given period of time using modeling tools. This means to more fully protect the project assets, an owner must purchase “catastrophe” coverage, above that provided in their basic property coverage.
Windstorm loss history
A number of global windstorm losses have affected wind-farm coverage. In September 2008, Hurricane Ike passed near Jamaica where a $28 million wind project had just reached full operation. The site was affected by winds estimated to have exceeded 140 mph. Its turbine rotors feathered as designed upon power loss, and yaw systems locked in place. Nearly all nacelle covers were lost. Fortunately, damage was limited to a number of electrical components and feathered blades where high winds struck their flat sides. Wind-driven flexing damaged blade roots.
More recently with Katrina, significant flooding (wind-driven water) damaged a wind farm under construction in the Gulf Coast. To date, these events have been limited, but if the wind industry continues to expand and seek new locations— especially along coastal areas—project debt and equity will require adequate protection.
The Japanese earthquake’s toll on nuclear facilities was a wake-up call to the world regarding the dangers of putting such plants on or near fault lines. There are, of course, wind turbines near earthquake zones such as those in California where there is a high risk of loss from earthquakes. As with the peril of Windstorm, property insurance underwriters will usually establish a sublimit of liability, again requiring project owners to seek additional coverage from the catastrophic markets to fully protect their assets.
Earthquake loss history
Like windstorm, the wind industry experienced recent loss due to earthquakes. In June 1992, two earthquakes struck the San Gorgonio wind-resource area and over 3,000 turbines near Palm Springs, California. The first, the Landers quake, was magnitude 7.3 with the epicenter about 15 mi north of the turbines. The second, the 6.4-Big Bear quake, struck three hours later about 40 mi northwest.
Service and maintenance crews immediately deployed to the wind farms to check for damage. Almost all vibration sensors shut down the turbines and severely curtailed power to the grid, resulting in lost revenue for project owners. The most common effect was displacement—in some locations up to 12 in.—where soil around foundations indicated that the turbine had swayed dramatically. No machine actually fell, a testament to the quality of the foundation’s design and strength of the towers that might have been expected to buckle under the strong, rolling earth movement.
Wind-farm flood exposures are relatively rare because most turbines are generally installed on ridge lines, mesas, or mountain slopes—areas rarely affected by floods. However, heavy rains on project sites can erode access roads and scour earth from around turbine foundations. Recent events in the U.S. have resulted in complete turbine collapse.
How much coverage?
Knowing that a project’s basic Operating All Risk insurance policy will generally include a sublimit for catastrophe cover, the question becomes: How much additional catastrophe cover should a project owner buy?
It is almost a given that the cost of purchasing catastrophic insurance to the full replacement value of a project in a highly exposed area will be far too costly. As a general rule, most projects work to 30 to 50% of their asset value but also give some consideration for debt service.
So, what to do? It is generally recommended that a project owner commission a Maximum Foreseeable Loss Analysis from an independent, experienced consulting firm. This provides a more reliable and accurate model on which to base insurance buying decisions.
Another complicating factor is that these costs can vary widely from year to year because the cost of catastrophic coverage in any year is highly dependent on the market’s loss history during the previous several. In 2005, after the worst year for insured catastrophe losses with Katrina, Rita, and other storms, insurers were required to establish stronger financial reserves to maintain financial ratings. Consequently, after a year of significant losses, insurers will move quickly to reestablish financial strength and their ratings. This leads to more volatility in pricing.
Resolution of the levels of insurance coverage on wind projects in catastrophic high-risk zones is a complex issue that must be addressed early in a project’s development cycle. Attempting to finance and insure a wind project in a high-risk zone without having a fully justified and researched answer to the insurance question will be almost impossible.