Risks in Biomass

Energy’s Quiet Power

Biomass is a growing energy source, but has its own set of risks.
By: | November 1, 2013 • 10 min read

By analyst estimates, biomass accounts for about half the alternative energy in the United States. This comes as a surprise to many people, because wind and solar energy get all the headlines.

Burning wood chips or agricultural waste is not sexy. It is also not always simple. For many years, the bulk of biomass facilities were purpose built, often as serendipitous methods of waste disposal.

More recently, older power plants, particularly coal-fired ones, are being partially or completely converted to burn biomass. This raises significant risk management and insurance concerns.

Also, larger commercial-scale biomass facilities are being planned in North America and other countries. Those present other challenges, including project financing and fuel-source reliability. With the exception of project financing, which has limited markets, biomass energy coverage is reported to be readily available, according to brokers and underwriters.

In early September, GCube, one of the leading underwriters for renewable energy, was selected to provide insurance for two large biomass projects in the U.K. One, in Kent, southeast of London, is called Ridham Dock and will be a waste-wood pellet combustion facility that will provide 80 MW (million watts) of electricity. The developer, Renewable Energy Projects, expects the plant to be completed by March 2015.

The second project is a $130 million, 15 MW, combined heat-and-power plant in Belfast, Northern Ireland. It will also use wood waste.

In June 2013, GCube increased its biomass and geothermal construction underwriting capacity to $250 million, to meet increasing market demand.

Risk Management Concerns

One of the first projects to benefit from GCube’s coverage was the 36 MW Mackenzie Bioenergy Project in British Columbia, Canada.

“Worldwide, generating power from wood waste and other biomass is a broad trend in the current age of austerity we are seeing in North America, the U.K. and other countries,” said Jatin Sharma, business development leader, GCube. “This trend also feeds from the shift away from coal to greener fuels, even for older power plants and boilers.”

Sharma said there are five essential risk management concerns in any biomass energy project: regulatory, credit or finance, resource, construction and operational.

“For projects of any size, there is usually some government incentive or credit. Mostly, those are secure, but could be withdrawn at any time. That raises the question of credit risk. Not just for the project, but for the suppliers, contractors and power customers,” he said.

Resource risk is a new one for biomass. For years, plants burned what was at hand. There are now plans to build biomass energy plants in places where the lumber is coming from overseas and the wood for the lumber from a third country, Sharma said.

That is a long supply chain. “There is a risk element to signing a 15-year electricity supply contract for a facility in Africa if the original wood is coming from Sweden or Canada,” he said.

Also, because even the large biomass projects are smaller than standard commercial hydrocarbon fueled power plants, the contractors tend to be smaller firms as well. And while much of the technology is well known, the field is evolving rapidly and components are not yet standardized.

Indeed, managing growth is just as much of a challenge in this business as are specific risks. Global power generation from water, solar, wind and other renewable sources is projected to increase by more than 40 percent, to almost 6,400 terawatt hours, roughly one and a half times the current U.S. electricity production, over the next five years, the International Energy Agency estimated.

“For us, insurance is secondary. Risk transfer is an essential management tool. But engineering comes first.”

— Mark McAdams, high hazard occupancy specialist, FM Global

At the same time, renewable development is expected to increasingly shift from Organization for Economic Co-operation and Development countries to new markets, with emerging countries accounting for two-thirds of the growth.

While solar and wind projects have high visibility, waste-to-energy is not as readily recognized, according to a white paper published at the end of 2012 by ACE USA. In it, Darren Small, vice president and underwriting manager, National Custom Casualty Energy unit, explained that waste-to-energy includes the widest and most diverse spectrum of technologies and products in the renewables field. That makes assessing and managing associated risks more complex.

“In conducting the research for the white paper,” said Small, “we found a wide variety of expertise in risk management among biomass energy operations. That ranged from no risk management focus at all to only just some. We were very surprised at the vagaries in the industry.”

Small added, “In the white paper, we tried to focus that need for comprehensive risk management on the full range of risks: technology, financing, construction, operational, market, and even weather.”

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He said it is important to raise awareness both within the biomass energy industry as well as among risk-management professionals, brokers and underwriters.

“This business continues to grow,” he said. “We know because we are adding staff and writing broader risks. We are meeting with more brokers and clients.”

World Leader

In the United States — the world leader in biomass power — biomass plants provide about 8,500 MW of electricity from renewable sources such as wood and agricultural wastes, according to the Biomass Power Association.

In 2011, 75 waste-to-energy plants, a subset of biomass, operated in the United States, with a total capacity of 2,238 MW, according to the U.S. Energy Information Administration.

Generally, biomass is taken to mean the burning of biological material, although it is often imprecise in definition. As an energy source, biomass can be used directly or converted into other products such as biofuels. The process is also carried out at coal-burning plants as a substitute fuel, and common risks arise from the large quantities of light, dry, dusty fuels involved.

“Combustibility, fire, burn back and explosion dominate the risk profile of waste to energy,” according to the ACE report. “A frequent source of concern is that plants may not have been as rigorously designed as befits the power plants that they actually are.

“Project lenders demand greater guarantees against the risks of new and developing technologies,” it said. “Among their concerns are the scope of the warranties that protect revenue streams critical for debt servicing and performance guarantees. A warranty, for instance, may cover a breakdown in machinery but not other losses in production such as business interruption and consequential losses.”

Those costs can far outweigh the cost of the equipment, the report said. In addition, owners and operators need to realize that when warranties expire, the cost of insurance will likely rise. Lenders may require performance guarantees.

“While well-designed systems can serve to reduce the differences between expected and actual output, measuring plant performance over a long period of time presents a risk that is often misunderstood as it involves contractual obligations and complex climate data calculations,” the report stated.

One suggestion from ACE is that a project that has a broad range of protection through insurance — for instance, policies that cover systems performance, warranties or weather — may be more attractive to lenders. Conversely, if the project owners or operators are taking on all the risk, they may have a more difficult time with financing. In most cases, project finance will not become available unless insurance is in place.

Managing Change

“The challenge in the biomass business is managing change,” said Mark McAdams, high-hazard occupancy specialist at FM Global. “The business is not new, but there are a lot of changes. It seems obvious to mix some tire chips in with your coal, but as soon as you start burning things for which the boiler was not built, it is absolutely critical that you review the risk management profile and insurance program on that facility.”

McAdams said that any change in fuel type or feed mechanism also often requires changes in operational and emissions controls, refractory linings, waste management and insurance.

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“Trash-burning waste-to-energy facilities from the ’70s and ’80s were the poster children for changing fuel and waste conditions. They suffered a lot of corrosion and erosion,” he said. “You really don’t want to guess or hope. You really want a formal review process. A change in fuel would not likely void insurance outright, but it is a change in operations and a change in exposures, so should definitely be discussed with your carriers and brokers.”

In general, FM Global sees three types of biomass energy facilities: small or mid-sized industrial cogeneration units that are just as much waste management as they are power generation; larger cogeneration facilities that are often connected to other nearby operations or to the power grid; and large commercial power plants.R11-13p62-64_08bio.indd

“Having paid losses in the past on biomass power, we know what questions to ask for any size facility,” said McAdams.

“For us,” he stressed, “insurance is secondary. Risk transfer is an essential management tool, but engineering comes first. Better to eliminate or mitigate risk. In biomass, risks are meaningful and are changing, but are definitely manageable.”

McAdams added that capacity is generally available. Conventional biomass-fired power rates and premiums, terms and conditions

McAdams added that capacity is generally available. Conventional biomass-fired power rates and premiums, terms and conditions are broadly in line with power generation. Waste-to-energy, especially when municipal solid waste streams are in the mix, tend to run more expensive and more restrictive, because of the variability and unknown factors in the feed slate.

There is further complication as biomass develops into biogas and biofuels. “As you move from power generation to chemical transformation, you change the exposure,” said McAdams.

“The old manufacturing-based policies were not up to the challenge,” especially in the area of business interruption, said McAdams, “so we created a new policy that is equally adaptable for biomass or conventional generation.”

David Scott, Utilities Practice leader at Willis, confirmed that capacity for biomass energy is readily available.

“Any market that would write conventional power generation would write biomass,” he said. “We tend to see very similar coverages, rates and terms, with the exception of harvesting methane from landfills. There have been some losses in that segment. Some markets might look twice at that risk, but even there, coverage can be placed. The loss history is just reflected in the premiums and limits.”

Broadly speaking, Scott said that underwriters look favorably on conventional biomass, if always with an eye for fire protection for fuel stocks. He said that if fuels are dry, there can be a risk of dust fires, and if the wood pile is wet, it is subject to spontaneous combustion, similar to damp hay in a barn.

Among conversions, Scott said, one important challenge for insureds and carriers alike is contractor quality and builders’ risk.

“Generally, conversions are favorable under renewable energy strategies and incentives, but you have to look very closely at the reputation of the contractors,” he said.

While the major national and global engineering and construction companies tend to build commercial -scale power plants, biomass conversions are often done by local or regional firms. Those are not necessarily any less capable, but they can carry less coverage.

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Willis is also alert to the challenge of project financing.

“Backers of projects are looking for some protection if a project fails,” said Scott. “That is not readily available in some situations. Only a few markets will write, and when they do, it takes a long time to place. And when it is placed, it is expensive: 10 to 15 percent of the insured value. So $10 million of coverage will cost $1 million to $1.5 million for a five-year premium.”

Still, there are signs that new markets are exploring project financing coverage as all types of renewable energy projects grow and spread.

Swiss Re Corporate Solutions commissioned studies that found generation capacity from renewable sources of energy will continue to grow significantly and related investments will reach about $300 billion by 2030. To fund these assets, developers and utilities will increasingly rely on institutional investors.

Renewable energy is also a vital asset in the efforts to mitigate climate change and reduce carbon emissions. For that reason, it is gaining in both economic and political importance.

The Scenarios for Climate Change study, conducted by Swiss Re and partners from the public and private sectors, suggested that low-carbon technologies contributed 23 percent to the global power supply mix in 2010, while fossil fuels accounted for 77 percent.

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 [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.