Author: Kirsten Bonke
Winds are stronger and more reliable out at sea, which is why wind turbines are being built there at an accelerating rate1. But getting this power back to shore is not always easy – so who bears the cost when things go wrong?
All offshore wind farms are dependent on grid connection infrastructure, which in many cases is owned by grid operators. Yet if a wind farm is not able to supply power to the grid, the operator does not get paid.
For this reason, Contingent Business Interruption (CBI) protection is an important “add-on” to the usual business interruption insurance policies for windfarm owners. It aims to cover them against the risk they will lose revenue if the grid connection is interrupted.
For (re)insurers offering such coverage, it is critical to understand who bears the financial burden of grid connection failures. The rules on this differ significantly from country to country, with grid infrastructure a liberal market in some jurisdictions and heavily-regulated in others.
It may seem intuitive that if grid infrastructure fails, then the grid operator should bear the cost. And indeed, in many jurisdictions this is largely the case – typically, insurers pay up-front to cover a loss, but make recoveries from grid operators later. But it is not consistently so everywhere.
Connections, connections
Offshore turbines are connected to the onshore grid in two ways. Nearshore farms can be linked direct to an onshore substation; while those farther out are hooked up to an offshore platform that contains electrical transformers and converters. These convert power to DC (Direct Current) for efficient long-range transmission via sea cable back to shore; where it is reconverted to AC (Alternating Current).
Typically, it is these DC converters and long-range cables that are owned by grid operators. Several different windfarms can feed into the same connecting infrastructure.
For insurers offering CBI coverage, this could create aggregated risk exposures – the failure of one grid element could lead to policies being triggered across several different insured wind farm operators.
Losses could be material
Events that could cause a major failure of an offshore substation, a sea cable or an onshore substation include technical failures, natural catastrophes, vessel collisions, war, cyber or terror incidents.
As the size of turbines, windfarms and clusters increases, this will only increase the demand for insurance and reinsurance coverage. At the same time, larger-scale substations that can link up more wind farms may present a greater aggregation of risk.
Around the world, there are now many offshore wind farm clusters whose annual revenues can top a billion dollars.
These clusters may have different weak points with regards to their dependence upon grid infrastructure – they may share an onshore substation or a single sea cable. As soon as they have such a weak point, then a single significant event – a failure that required several months’ repair time, for example – could cause very substantial losses.
Legal consequences of major grid infrastructure events
The failure of grid connection infrastructure can have very different consequences for wind farm operators – and their CBI insurers and reinsurers – depending on what country they are operating in. The financial burden may fall primarily upon them, or upon the grid operator, or be shared to some extent.
Below we outline the frameworks in Vietnam, Belgium and Germany, which illustrate some of these differences. While Vietnam, for example, offers no compensation to wind farm operators for grid incidents, Germany largely protects owners of windfarms (and hence, their insurers).
Many other countries, such as Belgium, are somewhere in between – offering some limited protection, but not enough to compensate for the magnitude of loss which may be caused to windfarm owners, their insurers and reinsurers.
Vietnam
Under the current wind power regulations and the existing power purchase template used by the Vietnamese grid provider – Vietnam Electricity Corporation or EVN – there is no remedy to protect the wind farm owner against delays and disruptions relating to the grid connection in Vietnam.
This means that even if the grid operator has negligently caused a longer stoppage due to extensive maintenance works or a defect, no compensation can be demanded by wind farm operators and their insurers.
Belgium
Belgium’s high-voltage transmission system is operated by a private monopoly operator, Elia, that is listed on the stock exchange, but 45% owned by a coalition of municipal governments. Elia is responsible for the construction and operation of all onshore and offshore grid connections in the country.2
Under the terms of the relevant regulations and agreements, an offshore wind farm operator has some protection against unavailability of the grid connection due to technical failures or poor maintenance. However; these must be shown to be due to Elia’s error, misconduct, or intent. Moreover, the grid operator’s liability is capped at EUR 5,000,000 per claim.3 There is no compensation for any ‘force majeure’ events, such as a flood or storm event causing a major damage.
This means that CBI insurers paying out to cover any lost revenues would only be able to recover from Elia according to the terms above.
Germany
The situation in Germany – and in several other markets like it – is much more favorable to the wind farm operators and their insurers. The Energy Industry Act § 17e4 protects them against:
- a delay in completion of the grid connection,
- unavailability of the grid connection the due to failures, and
- unavailability of the grid connection due to maintenance works
Compensations for delayed grid connections are only available if the delay is more than 90 days or in case of operating windfarms if the disruptions in the grid connection are longer than 10 consecutive days.
In these circumstances, insurers should be able to recover up to 90% of the value of any losses arising from covered events from the grid operators – who in turn, are ultimately backed by the German government.
Reinsurance challenges
The above issues can present significant complications for reinsurance. There may be not enough capacity for CBI reinsurance in the future, particularly not as standalone reinsurance placements.
Nevertheless, Gallagher Re has strong relationships with reinsurers and methods to assist in such negotiations, supported by strong technical knowledge of the renewable energy industries. We have arranged such cessions and ironed out similar difficulties in the past.
As in many other industries, Contingent Business Interruption covers fulfil a vital need in offshore wind. Where companies face the risk of lost revenue due to factors beyond their own control, it is only prudent to buy protection.
Insurers and reinsurers covering such risks face a challenge in familiarizing themselves with the vast array of regulatory and customary approaches across the globe – especially in this new and fast-growing sector.
As the world gets to grips with the energy transition challenge, the amounts invested and the revenues at risk are only set to grow. That makes the need for thorough due diligence on risk and regulation all the greater.
