An analysis of the most pressing concerns based on insights from 1,000 UK business leaders.
11 November 2024
Insights
The heightened global consciousness surrounding climate change has inevitably steered the transition towards a net-zero emissions future in which renewable resources, mainly wind and solar power, assume a prominent role. Currently in the US, with the successful deployment of more than 144,000 MW of wind power capacity, wind is the largest renewable energy source in the country1. History is also being created on the other side of the Atlantic, with the UK seeing more electricity being supplied from wind power (32.4%) during the first quarter of 2023, surpassing gas (31.7%)2.
While renewables provide sustainable alternatives and offer a greener path in contrast to traditional energy sources, the bespoke requirements needed to facilitate infrastructure development, operational management, and ongoing maintenance often bring about new risks and challenges.
With ESG mandates and new regulations supporting cleaner energy sources gaining traction, it is vital to identify where the risks lie and strategise mitigation techniques.
Escalating frequency of natural catastrophe events
Wind turbines are designed to exceed standard operational thresholds. However, when subjected to natural catastrophes, their resilience is rigorously put to the test. The escalating occurrence of such NatCat events amplifies the risk of damage in the sector. This surge in the frequency of natural calamities has both insurers and corporations questioning whether this heightened level of exposure is the new norm. Insurance readjustments and reconfigurations are necessary due to the greater risk of natural catastrophes associated with renewable energy sources compared to conventional fuels.
The higher chances of NatCat episodes have played a vital role in maintaining elevated pricing levels, with markets continuing to drive premiums higher and bolster their ratings persistently. New entrants in this sector are willing to underwrite most of the risks but under more stringent terms, including sub-limits on specific coverages and the imposition of higher deductibles.
Impact of damage over time
While the average operational lifespan of a properly maintained wind turbine is around 20 to 25 years, as time passes, the impact of damage becomes more evident. Thus, a critical risk is the potential for equipment damage and failure. This is not confined solely to onshore wind farms; it extends its reach to offshore installations as well.
Offshore wind turbines face greater exposure to equipment damage due to unpredictable weather at sea and vessel interference. Significant causes of equipment damage can also arise through offshore cable damage during installation, and damage caused by passing vessels, particularly from trailing anchors. Such occurrences will require extensive and expensive cable re-laying efforts, resulting in prolonged downtime, reduced efficiency, and increased operational costs.
Headwinds from rising inflation rates and supply chain challenges
Despite favourable regulatory progress promoting renewable energy sources, offshore wind energy has encountered challenges stemming from uncertain economic conditions and supply chain disruptions. A survey by ONYX Insight concluded that supply chain issues remain the most significant disruption to wind operations, followed closely by reliability and original equipment manufacturer concerns3.
The uptick in inflation has resulted in an impact on the cost of materials, equipment, and labour required for offshore wind projects. It was just two years ago that offshore wind developers were planning projects based on a projected cost of USD77 per megawatt hour (MWh); now it has risen to USD114 per MWh4. These cost increases have been a cause for worry among winning bidders, with some of the world’s largest developers even walking away from projects based primarily on this reason5.
Meanwhile, despite growing component costs, the UK reduced the price cap from GBP46 per MWh in the previous auction round to GBP44 per MWh, leaving developers and suppliers unhappy and requesting the price be indexed to inflation6.
Wind crime and vandalism a concern
Large-scale wind farms are usually located in remote areas and operate with minimal labour involvement. Though this operational setup may reduce labour costs, it presents a tangible challenge in the form of equipment theft (scrap metal and rare earth magnets) and vandalism, posing significant concerns for the industry.
The risk of theft within the wind energy sector can also manifest in a rather unconventional manner, particularly in the case of offshore wind farms. These installations can ‘appropriate’ the energy capacity of neighbouring wind farms by as much as 20% within a 50-kilometre radius due to wake loss. The existing regulations surrounding this practice, which need more clarity, require refinement to better facilitate the expansion of large-scale offshore wind projects in the North Sea and other bodies of water7.
Concerns over sustainability
The evolution of technology in the sector over the last 20 years is highlighted by the shift from 500 KW units to the current 5 MW and 6 MW turbines on single wind towers. This technological progress is ongoing, resulting in even larger and more efficient turbines.
However, this swift progress poses challenges as insurers struggle to keep up. This is often due to the need for more data to understand the long-term effects of the novel technology and precise regulation surrounding liability, especially once artificial intelligence is utilised.
The developments in technology have also led to the decommissioning of turbine blades. In the US alone, more than 8,000 turbine blades are poised for decommissioning in the forthcoming years. For UK offshore wind, it is projected that approximately 600 turbines may be phased out by 2030, and a further 800-900 by 20358. Being made of fibreglass material, their recycling poses a considerable challenge due to financial constraints.
Hence, many projects are opting to shred the fibreglass blades and incorporate them as an additive in cement production, while others are repurposing the materials to manufacture composite products. Companies are also refurbishing turbines as a cost-effective alternative, allowing for extended performance at a fraction of the cost of new turbines.
Watchful optimism for the future with major players upbeat
Despite the inherent risks, the industry is cautiously optimistic. In the US, this is mainly stemming from the substantial backing through new tax credits, such as the Inflation Reduction Act, and subsidies dedicated to clean energy investments.
For the most part, the outlook for the UK wind sector is positive. Several projects have secured extension rights and sought out additional funding. Investors are also chasing M&A opportunities in operational projects.
The leading manufacturers of wind turbines worldwide, such as GE Renewable Energy, Siemens Energy, and Vestas Wind Systems, along with their associated suppliers, are pinning their hopes on substantial growth prospects over the coming decade, with a special focus on the emerging offshore wind sector9.
It is expected that by early 2025, renewable energy sources will surpass coal as the primary global electricity generation source. Moreover, projections indicate that by 2027, the output of electricity from solar and wind power will more than double, ultimately contributing to 20% of the world's total power generation. Despite the current challenges, the future for wind energy does seem bright10.
