This opinion expressing the views of Peter Fitzsimmons, Head of Onshore Renewable Energy for London, AXIS Insurance, was first published on February 16th 2022 by Insurance Day, which can be found here.
While the past two years have brought pressure to many industries, the renewable energy sector continued to move ahead briskly and even thrived. In 2021, 25.9 GW of new solar PV was installed in Europe; the largest ever in a single year.
However, the past few months have not been without challenges and there are some indications of the issues the industry will face in the near future.
Recently, renewable energy equipment manufacturers including Siemens Gamesa, Vestas and Solaredge among others have reported issues with components or logistics. All expect these issues to last well into 2022, with Siemens Gamesa citing “sharp increases in commodity prices, shortage of certain components and logistics bottlenecks with high transportation costs” as factors affecting company performance.
Silicon, a key component in the manufacture of solar panels, is 300% more expensive now than the start of the 2021 summer. A sharp increase in the cost of new and replacement panels is imminent. If this situation continues, it is likely this pain will have to be shared with developers and lead to increased costs of equipment and therefore increased cost of replacements across the industry.
Supply and Demand
In the renewable energy sector, this inflationary pressure is accentuated by limited scope to increase supply in the short term and an explosion in demand as governments around the world respond to climate change goals and look to “build back green” following the slowing down of the global economy. Many factories are at maximum output and squeezing in an additional order for a set of blades or a replacement inverter is taking longer as a result of the surge in demand.
The concentration of manufacturing plants for wind and solar energy components in relatively few locations also makes the industry incredibly vulnerable to increased shipping costs.
The cost of sending a container from China to the US has increased 500% in the past 18 months, which, along with the rising costs of raw materials, means original equipment manufacturers (OEMs) are required to put up prices despite the fierce competition in the sector. We are beginning to see examples of this with wind turbine OEM Vestas, which is thought to be implementing price increases of close to 10%.
In spite of this, renewals are often presented to us with a reduced value of the assets compared with the previous year, usually based on a per MW basis, as opposed to reviewing replacement costs per component. These submissions assume if the projects were either sold or rebuilt, this would take place on a greenfield site but overlook the additional costs of purchasing a standalone replacement component.
These lower valuations are likely to be the inverse of expected claims costs over the coming years, creating a concerning situation for renewable energy insurers: a decrease in declared values, leading to a decrease in premium while the cost per component increases.
This pressure is not just limited to the property damage element of policies, with business interruption equally as exposed. As lead times increase as a result of bottlenecks in the global supply chain, business interruption losses are also expected to increase. However, it is not just lead times that are putting pressure on these claims; rising energy costs will also contribute to higher business interruption claims for any policy with exposure to wholesale power costs.
With the renewables sector under greater pressure, insurers and brokers need to take additional care to ensure clients have adequate cover and protection in the event of a claim by checking the following:
• Cross-checking the declared values against losses on similar equipment and monitoring values given in submissions and against the amounts paid in claims for similar technology;
• Ensuring the basis of indemnity is linked to the statement of values and the statement of values details the cost per component of critical parts. This ensures the insureds get the coverage they intended and insurers are insulated from underinsurance, at least in terms of claims payment;
• Understand what is happening at that moment with power purchase agreements and the client’s exposure to moving wholesale electricity prices. With prices increasing, a 12-month indemnity period may be burned through in a much shorter period than intended; and
• Evaluate the distance from a manufacturing plant and understand exposure to shipping costs that are no longer incidental parts of the claims.
For insurers to evaluate the true cost of claims over the next 12 months, they must consider increasing commodity prices, component shortages and logistics bottlenecks. Failure to construct terms and conditions that reflect real-world product values will mean claims paid will not be commensurate to the scope in which the projects were underwritten and cause losses.
In a market that has been correcting for a number of years, an increase in the size of claims may cause further price corrections which would add to the burden faced by project sponsors.