Environmental Risk

Changes in Energy Regulation

The power of states and individuals to bring action in the case of an environmental event remains intact despite the new administration's proposals.
By: | April 7, 2017 • 5 min read

Even as the Trump administration takes steps to ease environmental regulations and defund the Environmental Protection Agency, insurance and environment experts expect little change in companies’ environmental stewardship or long-term responsibilities.

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“I expect companies to stay the course of social and environmental responsibility,” responding to their own corporate cultures, the long-tail nature of environmental claims, tort law and regulations by each state’s Department of Environmental Protection (DEP), said Tom Williams, head, environmental liability, North America, Allianz Global Corporate & Specialty.

“Underwriters will still look for companies to take environmental and health and safety programs seriously,” said Marcel Ricciardelli, lead environmental insurance underwriter, Allied World.
“We look for a history of robust environmental risk management.”

The long-tail nature of environmental liability, said Avram J. Frankel, principal, Integral Consulting Inc., an international science and engineering firm, helps incentivize companies to support strong environmental programs.

“Administrations may end in four years, but environmental liability keeps on going.”

Long policy terms “lock underwriters into risk for the long term,” said Ken Burrell, managing director, Synapse Services LLC. Most of his clients plan accordingly, with 10 to 15 year business plans — exceeding even a two-term administration — that include budgets for environmental controls and risk management.

In addition, he said, “reputational risks are high considerations in business decisions, regardless of regulatory enforcement. Companies don’t want blowback from a blowout.”

What Regulations May Change?

“Expect a focus on the Clean Water Act and Clean Air Act,” Burrell wrote in an email. “If budgets are reduced, there will be fewer resources for enforcement, but reduced regulatory enforcement will not necessarily reduce exposure to loss. If enforcement wanes, expect an increase in litigation from private citizen suits in an effort to drive action.”

The EPA takes the lead in some regulatory arenas, Frankel said, and states lead in others. In some cases, the EPA delegates authority. Enforcement varies by state.

Past administrations’ inconsistent environmental track records confound predictions in this one, he said. New restraints are unlikely under President Trump, who declared in February that environmental regulations are “out of control.”

“It appears that much, if not all, pending rulemaking could be suspended under this administration,” Frankel said.

Final rules take years to promulgate, he said, and normally take years to undo. For example, the Stream Protection Rule — which seeks to protect waterways from coal mining residue and which Congress rolled back in February by invoking the seldom-used Congressional Review Act — was the result of eight years of review and analysis by the states and scientific bodies, said Pat Parenteau, senior counsel, professor of law, Vermont Law School in a National Public Radio interview.

The speed at which Congress acted to undo the Stream Protection Rule introduces “a brave new world for environmental regulation at the federal level,” Frankel wrote in an email.

“We appear to be in a new era, and it will be entirely up to the states to regulate these matters.”

Kevin Haas, partner, Clyde & Co.

Also “in peril,” said Kevin Haas, partner at Clyde & Co., an international law firm, are federal regulations pertaining to oil and gas exploration, offshore and ocean drilling, fracking, interstate oil and gas pipelines. Regulations that could curtail those operations in the interest of endangered species and national parks may also face rollback.

The administration’s February freeze on new and pending regulations would halt four very nearly finished Energy Department efficiency standards designed to reduce energy use, consumer bills and greenhouse gas emissions, according to the “Washington Post.”

Even in the absence of federal regulation or slowdown of enforcement — which would trigger significant pushback from the agencies themselves — states would continue to regulate, said Frankel, and tort law will continue to pressure companies toward environmental responsibility.

Federal standards usually represent the minimum, said Ricciardelli. Insurers can expect little change in enforcement in states with strong environmental protections, such as California, Washington, Oregon, Massachusetts, New Jersey and New York.

For example, New Jersey’s air standards, said Larry Hajna, press officer, N.J. Department of Environmental Protection, historically exceed the EPA’s, driven by “the need to achieve federal clean air standards in a densely populated state with a lot of cars and industry.”

Even some oil- and gas-producing states have their own strict regulations that “we don’t see changing soon,” said Kevin Sisk, senior vice president, Lockton.

These include Louisiana, where a closely watched lawsuit against more than 90 oil, gas and pipeline companies alleges degradation of wetlands that form a natural hurricane buffer for New Orleans by drilling and dredging canals along the coast.

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Claims related to that case may go back 100 years, said Sisk. “Any changes to federal regulations wouldn’t change potential liabilities associated with that lawsuit or with other common industry exposures.”

Counterintuitively, a reduction in exploration and production can trigger a spike in certain claims, said Sisk, when combined with a financially distressed industry.

After commodity prices collapsed and the moratorium on offshore drilling from the 2010 Mocondo Well blowout in the Gulf of Mexico, some companies laid off staff and deferred preventive maintenance, which contributed to pollution releases.

“Any changes to federal regulations wouldn’t change potential liabilities associated with that lawsuit or with other common industry exposures.” – Kevin Sisk, senior vice president, Lockton

“The oil and gas infrastructure was neglected when companies couldn’t explore for new reserves,” said Williams. He speculates that the inverse will happen in the Trump administration.
“Presumably, the pendulum will swing in the other direction in the next administration,” said Haas.

More drilling, mining, exploration, etc., also creates more opportunities for risk of spills, leaks, effusions, contaminations and damage to endangered species, said Haas, but risk management tools and techniques, including new technology, can help prevent loss of product and claims from spills.

Energy companies and carriers can seek technological risk management and insurance solutions. “The Internet of Things contributes to fewer accidents by monitoring temperature, pressure, flow and leaks in pipelines and drill sites where people can’t see,” Haas said.

“Technology could offset adverse impacts from reduced regulation and EPA personnel on the job.” &

Susannah Levine writes about health care, education and technology. She can be reached at riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.