Posted on 14 Oct 2011
Despite the twin challenges of harsh weather conditions and new technology, offshore wind power generation will become a major source of renewable energy in the UK over the next decade. The sector presents both challenges and opportunities to underwriters, but Lloyd’s underwriters are well positioned for future growth.
Wind energy set to grow
The UK, with its coastline of shallow waters and strong winds, has the largest potential offshore wind resource in the world, according to the British Wind Energy Association (BWEA). Studies estimate the generation potential is equivalent to several times the UK’s total electricity consumption.
The BWEA predicts the development of offshore wind industry will eventually add some £60bn to the UK economy and save 800 million tonnes of carbon dioxide emissions. The development of the sector will also create between 67,000 and 115,000 new jobs.
So far there have been two rounds of bids to develop UK offshore wind sites, and a third round is now under way. The first phase of the UK’s offshore wind industry – Round 1 – was launched in December 2000 and resulted in the first large scale offshore wind farm in the UK, at North Hoyle, built in 2003.
The first phase of development has led to many small-scale wind projects in shallow waters close to the coast, but the second stage developments are now putting larger turbines some 12km out to sea. Murray Haynes of Marsh says the third, yet to be developed, phase will be a real ‘game changer’ in terms of the massive increase in the cale of developments and the potential contribution to UK power generation.
“In the future offshore wind will be operating in deeper water with bigger turbines,” adds Haynes. “There is an upward curve in the size of units being planned and the depth at which they can operate. This will mean a learning process for underwriters in that they will need to understand the changes in the risks involved and tailor insurance cover accordingly.”
Well developed insurance
Lloyd’s insurers already provide property damage and third party liability insurance for offshore wind projects during the construction and operational phases. Cover can also include marine and inland cargo and transit, installation, testing and commissioning and delay in start-up cover.
Insurances for offshore wind construction and operating risks have already well established and have been adapted from cover developed for the offshore oil and gas sector. Insurers have also paid claims for losses in the construction phase and for damage to cabling used to bring the generated power onshore.
Warren Diogo, Underwriter at Ascot Renewco – which insures a number of UK offshore wind projects – believes there are some distinct opportunities for Lloyd's underwriters in offshore wind energy.
“Lloyd's has a long history of providing insurance to the offshore oil and gas industry and, while much of this expertise is relevant and transferable to offshore wind there are also distinct differences between the two sectors which need to be fully understood.”
There will be increasing opportunities for Lloyd’s as investment drives expansion in the sector, he adds. “As the offshore wind projects grow in size, number and complexity, there will be increasing demand for specialist insurance capacity and expertise.”
Development to fuel demand
Demand is ramping up as Europe strives to meet challenging renewable targets, says Richard Palengat of AEGIS. “We foresee a good pipeline of offshore wind projects and, as more projects come into line in the next two to three years, brokers will need to find more insurance capacity.
“Lloyd’s has an appetite for offshore wind risk, and we do already underwrite some wind projects at AEGIS,” says Palengat. “And we’re interested in writing more – as this plays to our expertise and complements the spread of existing energy business.” He believes demand will increase and create excellent opportunities for Lloyd's underwriters.
As the sector grows, a greater number of insurers will be needed to service the wind sector in the future, adds Haynes.
“Currently there is adequate capacity but not a wide enough range of insurers,” Haynes says. “There is so much premium potential it will be inevitable that more marine energy underwriters at Lloyd’s – with their expertise and capacity – would naturally want to engage.”
With offshore wind technology continuing to evolve, the insurance industry is still learning about the risks and claims experience. As lessons are learnt by the industry, underwriters will become more comfortable with offshore wind risks. And as expertise increases so will appetite and the ability to underwrite the risk more successfully, says Diogo.
The market is currently a challenging one for Lloyd's to make a big impact, in part driven by an oversupply of offshore wind insurance capacity from European carriers. With an early involvement in the sector, Ascot – like other Lloyd's syndicates – has taken a cautious approach to enable time for the sector to mature and gain the necessary experience to improve and develop best practice procedures and controls, adds Diogo.
Lloyd’s renewable energy event
Diogo was one of several speakers at a recent renewable energy event in Frankfurt, Germany hosted by the Lloyd’s Germany office – attended by more than 60 brokers, underwriters and specialists interested in renewable energy insurance.
The event was organised in response to the German government’s decision to replace nuclear power generation with renewable energy. It aimed to give the local market an in-depth insight into this class of business and to promote Lloyd’s as a platform of choice for energy risks – both in Germany and globally.