Chris Cioni/SVP- Underwriting/ GCube
Dan Cass/VP- Loss Control & Engineering Services/GCube
The North American wind market continues to experience short-term bursts of fast-paced growth. This activity is coupled with a wider, long-term impetus to extend turbines’ operating lifecycles and increase the availability of existing wind farms and fleets. This effort has shifted focus toward more lucrative long-term independent service schedules, along with operations and maintenance (O&M) contracts that often come into effect once traditional manufacturer warranties end.
This model of industry growth, while financially motivated, has major implications on resources. The race to meet last year’s commissioning for the production tax credit (PTC) led to competition for the resources necessary to complete a construction project. This can include the turbine manufacturer’s supply chain, competency of its development team, and even crane availability.
From an insurance perspective, this competition for resources, under tight time constraints, may lead developers to take shortcuts and make errors that increase the risk of worker accidents or poor workmanship. The scope and effects of which may not be revealed for years to come.
Although the PTC is a welcome force for industry growth, GCube shares the concern that, until the wind industry is able to build in a more consistent manner, the probability of unnecessary claims is higher than it need be.
What’s more, this inconsistent growth pattern and subsequent strain on resources hinders proper planning and maintenance work at existing wind farms. As construction on a large number of new projects gets underway, operators may find it difficult to procure the required equipment and labor to repair a turbine at an existing site.
With a growing focus on getting new projects up and running, amplified demand for parts may lead operators to move their inventories between wind farms, meaning, in the event of unexpected damage, the necessary spares are not available. When a repair takes an extended period of time to complete, it increases the number of days the insurer will be paying for business interruption. This artificially inflates insurance costs that might not have existed otherwise in a more consistent development environment. The unstable market has also contributed to a broader, more concerning, shift in the way maintenance is conducted in the industry.
Many companies have come and gone amidst these volatile conditions. During extended quiet periods, some component manufacturers have gone out of business, leaving operators with the challenge of finding obsolete stock. When the market picks up again, finding experienced labor and manufacturing plant capacity has become an increasing concern.
To reduce downtime as much as possible, in this business climate, a primary focus should be to ensure a thorough understanding of equipment and a supply of components. Insurance underwriters always favor a preventative and proactive approach to maintenance, as well as an effective loss-control program.
To an increasing extent, a number of plants do not follow proper maintenance practices and have adopted long-term O&M contracts that come into effect once manufacturer warranties end. However, these programs often fail to look beyond the turbines and gearboxes to ensure that proper maintenance and contingency plans are in place. Should a substation transformer fail, for example, an entire project will come to a standstill.
For many years, operators within the industry have favored a reactive maintenance approach. However, with renewable insurance claims on the rise, this approach is of significant concern to underwriters and capital providers.
Wind turbines are exposed to a range of adverse weather and complex-site conditions that create mechanical stress. Although a turbine may have a 20-year life expectancy, premature component failures still occur.
Numerous studies have proven the benefit of extending the life of turbines through proper maintenance. For equipment to meet expectations, the industry must adopt a proactive, preventative approach to deal with potential problems prior to occurrence. By acting in advance, overall downtime can be reduced, along with maintenance and labor costs, and can increase the availability of spare parts. Simultaneously, operators will see a boost to turbine life and the cost effectiveness of the entire project.
Insurance is intended for catastrophic failure, and yet claims based on mechanical consequential breakdown are steadily increasing. As the number of industry suppliers falls and available manufacturing capacity shrinks, lead times increase for repairs. In this environment, insurance providers may look to reward those operators with proactive, preventative-maintenance programs with lower deductibles, while raising rates for insureds with predominately reactive plans.
From an underwriting perspective, the market’s instability has necessitated a reevaluation of acceptable industry risk. Just as PTC uncertainty brings volatility to developers and manufacturers, the availability and quality of risk transfer can also negatively affect the industry’s long-term performance. In the last two years, there has been an unprecedented rise in the magnitude of insured loss events.
To retain the wind industry’s health, traditional measures such as price and breadth of coverage will no longer suffice – risk quality must evolve within the wind-energy insurance market. Greater scrutiny will be placed on the quality and track record of EPC contractors, the design of critical infrastructure to limit single-point catastrophic failure, and the quality of O&M services throughout project lifetimes.
Underwriters could begin to face pressure from capital providers to reduce exposure to wind-energy risks. Also, insurers could decline risks because of stringent lender requirements at odds with prudent underwriting practices.
When all is said and done, many underwriters would prefer a market where risk mitigation is a primary concern, shared by all parties – the insured, insurer, and lender. Volatile price movements do little to improve the long-term prospects of the wind-energy market.
With so many concerns, a new focus has been placed on keeping insurance claims and premium costs to a minimum. The most effective means of risk mitigation is to reduce the number of instances of premature component failure. The North American wind market would do well to follow the example of the traditional power generation market in which annual insurance inspections have become the norm. These proactive inspections let the operator and insurer determine where and when an issue might arise prior to occurrence.
For insurance to maintain its role in the financing and capitalization of projects, costs must stay within a certain percentage of overall expenditures. Failures engendered as a direct result of poor maintenance programs have a detrimental effect upon the financing model. More importantly, they are avoidable.
Short-term bursts of industry growth have shaped the North American wind market in a pattern that’s set to continue. Consequently, great pressure has been placed on developers and operators to cut corners, rush new projects to completion, and compete for resources. However, to keep insurers and underwriters on board, it is necessary to demonstrate a long-term commitment to proactive, preventative maintenance. WPE
Filed Under: Featured, News, O&M
