Alternative Energy

New Policies Fill Gaps in Green Energy

Improved analysis underpins coverage to smooth the intermittent nature of wind, hydro, and even solar power
By: | June 6, 2016 • 4 min read

Ambitious underwriters are learning to make hay while the sun does not shine. And when the wind does not blow, and the rain does not fall on watersheds.

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For years, the intermittent nature of nature vexed the green energy industry. Until recently it was addressed as a technical problem of storage and backup generation.

But recently, several insurers developed coverage that offer a financial recovery approach. To be sure, the demand is coming primarily from lenders and capital investors that back green power projects. The effect, if the markets grow, will be to help normalize both power and profitability.

While the mechanisms for the new programs are new, financial weather instruments are not, said Michael J. Perron, senior vice president for Northeast property placement at Willis Towers Watson, and a 2016 Risk & Insurance Power Broker® in the alternative utilities category.

“Wind productivity was down over the last couple of years, and banks are requiring some type of protection from insureds. The industry has these wind curves and they are just not performing.”

Michael Perron Senior Vice President Willis Towers Watson

Michael Perron
Senior Vice President
Willis Towers Watson

Generators themselves are not yet asking for coverage, said Perron, “but banks are saying, ‘your charts are nice but we need protection.’

“Risk managers at the generators may feel very comfortable with the long-term performance, but banks are asking for more. In some cases the lenders or investors are named as loss payee.”

In general, Perron said, the new demands from backers and the coverage being offered to meet them is beneficial in direction, if not always in degree.

“We do push back on occasion,” he said.

Using an analogy from earthquake coverage, he noted that “we had one client for which the bank demanded $100 million of protection. We modeled the case and found that the 500-year event would cost $20 million so we suggested buying $35 million in coverage.”

Weather Risk Transfer

Underwriter GCube brought its “weather risk transfer mechanism” to North America to respond to “increasing demand from U.S. project-financed wind operators, notably those refinancing or going through acquisitions,” the company stated.

“Utilities and independent power producers have directly cited below-par wind resources as a contributing factor to net losses in 2015 and the first quarter of this year,” it said.

“This financial underperformance, if left unchecked, threatens to undermine the reputation of wind energy as a low-risk, reliable investment — particularly with the emergence of new investors with less tolerance to lower returns.”

“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”– Bill Hildebrand, executive vice president, GCube

The basic concept, said Bill Hildebrand, executive vice president of GCube Insurance Services, is a contract with wind or hydro power generators. If the wind or rain is insufficient for the generators to provide the power that they have contracted to deliver, then parametric triggers would result in a payment under the contract.

“We are seeing increased requirements from insureds on behalf of their capital providers for revenue certainty,” said Hildebrand.

“At the same time, we have had carriers come to us with contracts they would like to distribute. Weather insurance has been around for a long time with the same interest in consistency and smoothing of revenue. What is new is this type of flexible contract that we are bringing on behalf of the capacity behind us.”

GCube is using Lloyd’s syndicate papers for backing. As a result contracts can be made on different terms.

Bill Hildebrand, executive vice president, GCube Insurance Services

Bill Hildebrand, executive vice president, GCube Insurance Services

“There are options,” said Hildebrand.

“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”

The contracts are being offered only to wind and hydro generators, not solar at this point. That is for two reasons: Solar has not seen the dips that the other green energy types have, and because the performance data on solar is not as extensive.

Early in May, a consortium of carriers executed a 10-year proxy revenue swap with a large U.S.-based wind farm. The arrangement allows for hedging wind volume risks for wind farms, to try to ensure stable revenues despite uncertainty of intermittent wind.

Advances in risk modeling and maturity of risk appetite were credited with making the deal more long-term in scope.

The 10-year agreement is designed to secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 100-plus MW farm.

But solar is not being neglected. Early in May, specialty insurer Sciemus launched a policy to protect the owners of solar farms against a lack of sunlight.

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The policy pays if levels of sunshine fall below an agreed amount, and it is available as a hedging instrument for solar farm operators for up to 10 years.

Other lack of sun insurance schemes are available, but they are tied into property damage programs, experts said. The Sciemus insurance can be purchased as a stand-alone.

The insurance is index-linked and pays a fixed price per unit of lost sunlight at the end of each 12-month period. It is calculated on the sunlight either at the solar farm or at the nearest weather station.

The coverage is available in Europe and North America, and Sciemus plans to roll it out into the Middle East and North Africa later this year.

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

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]