Regulation, shift to renewables leading to new risks: Willis review

Companies in the renewables market are being exposed to complex new risks as government regulation and volatile fuel prices continue to influence the merits of different types of power generation, suggests the latest Willis 2013 Power Market Review, released Thursday.

With the renewables sector continuing to thrive, operators and their underwriters must contend with many complex new risks, notes a statement from Willis Group Holdings Plc., a global risk adviser, insurance and reinsurance broker.

Wind power continues to grow – the Renewables Global Status Report cites global growth at a rate of 30% annually. Possible drivers include the EU Renewables Directive that stipulates at least 20% of total energy consumption in the EU will be obtained from renewable sources by 2020, and the same “20% by 2020” target being set by the Australian government.

To meet growing demand, Willis reports that renewable energy companies are building larger wind turbines. As these increase in size, so too do the costs when things go wrong, the statement adds.

But wind is certainly not alone with regard to risks related to renewables. Willis points out that concentrated solar power (CSP) is becoming more popular, particularly in the United States, Spain, Africa and the Middle East.

However, CSP remains a “high risk” technology for insurers compared with traditional photovoltaic (PV) arrays, notes the Willis statement. The insurance market has seen individual losses in excess of US$15 million for CSP heat exchangers, a number of fires because of poorly cleared land, and turbine failures that have resulted in single claims in excess of US$6 million.

In addition, notes the report, the level of machinery breakdown losses in the power sector as a whole is an ongoing concern for underwriters.

The need to accommodate more renewable generation to meet environmental goals has resulted in changing how many combined cycle gas turbine (CCGT) plants are being used, causing more wear and tear on machinery. Designed to operate at baseload (meaning at a steady and consistent capacity), these plants are now having to “two-shift,” a process in which a plant is shut down when demand for output is low and restarted when demand increases, Willis explains.

Willis advises power generators to ensure that proper engineering and operational practices are in place to minimize these risks.

Even with losses, capacity in the power insurance market has, to date, held up well and new capacity is entering the power insurance market, Willis reports. This is having a dampening effect on premium rates despite loss trends.

“The power sector continues to contribute more than its fair share of claims to the insurance market, and machinery breakdown losses continue to be a concern to underwriters, who continue to struggle to make an underwriting profit from their power book,” Graham Knight, deputy CEO of Willis’ Construction, Property & Casualty Division, notes in the report’s introduction.

“And yet the hard market that many have been predicting for a number of years has stubbornly failed to materialize, reinforcing the old adage that while lack of underwriting profits might be a necessary precondition for a market hardening, it is not in itself sufficient to bring one into being,” Knight continues.

“While there has been an upward rating trend this year in some areas, such as in North America, and conditions have generally become tougher for those companies that have passed losses to their insurers or have significant natural catastrophe exposures, there has not been the sudden withdrawal of capacity, hike in rates and restrictions in coverage that characterize the onset of a hard market,” he reports.

Though changes are taking place, the market environment is relatively stable. This stability is “very much to the credit of the insurance industry, which has demonstrated resilience in the face of continuing power sector losses and shown that it is there for its clients for the long term,” Knight adds.