April 11, 2012

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What challenges does this present for the development and evolution of the clean energy markets and how is the insurance industry working together with developers to better understand and hedge against this risk?

As with anyone making an investment in large-scale, heavy-duty mechanical equipment, manufacturer warranty programs provide an additional level of support to fixing operating and maintenance costs and securing lender confidence as much as they provide product protection.  Implicit within the agreements is a manufacturers’ acknowledgement that they are confident in the durability and the quality of their product and that perhaps most important of all, that it will stand the test of time.

In the automobile industry, manufacturer warranties have become a mainstay of future sales, with some manufacturers placing as much emphasis on the guarantee as they do on the specifications and performance of the vehicle.  It also proved to be the cornerstone of key Asian manufacturers looking to develop and build existing market share within established western markets.

Perhaps then, it’s no surprise to have seen warranty agreements have such a profound impact on the North American and European wind energy markets.  And given the increased level of assurance that they initially offered, it’s now only natural to begin to see such profound levels of uncertainty emerge within wind farm developer and investment communities, as these key initial operational support programs come to a close.

Let’s be clear.  As turbines begin to come out of long-term manufacturer warranty agreements, uncertainty remains around equipment reliability and availability, and around operating and maintenance costs.  This is further complicated by the wide variation in warranty duration, terms and conditions, financial incentives and the original equipment manufacturer’s (OEM) role in project operation and maintenance.

Add to this the ability to forecast future equipment performance based on past performance –condition monitoring and repair expense data that usually remains exclusively with the OEM – and the transition becomes all the more complex.

Nevertheless, it is a transition that must occur.  And, just as in the world of car ownership, where new purchasers may well rely on independent and impartial experts to perform an inspection, so too must it be with wind.

Naturally, for the developer and investor communities it’s gaining a greater understanding of the failure rates that really sparks the interest.  And while it’s nearly impossible to truly understand and predict turbine failure rates, it’s an area that needs further assessment and work.

In fact, it’s precisely because of this that we’ve already begun an in-depth study to characterize and quantify the factors that lead to differing performance rates between the North American and European markets.  It’s an important piece of work and something that we’ll continue to keep you up to date on and share with you, as the initiative develops and grows.

Within the insurance markets, many new market entrants have been quick to offer supposed warranty protection programs – an initiative that has already been well documented within the industry and the press.  While arguments exist both for an against such offerings, the common consensus from many market stalwarts, and a view supported by GCube, is that these performance protection packages will prove difficult to sustain.

In fact, it’s why we began investigating our own enhanced defects package last year; an initiative focused on helping developers and investors make the transition away from traditional manufacturer warranty programs, while still providing them with practical, hands-on engineering support.  As part of the policy, we are trying to address unforeseen and unscheduled repairs associated with defective wind turbine parts, faulty workmanship and design, as well as the longer term costs associated with removal, replacement or repair.

The goal of this offering, still in development, will be to ease operator uncertainty and providing long-term practical and pragmatic support.

It is expected to fit into the growing dialogue between lenders and owners/operators focusing on recognizing and planning for the replacement of certain equipment and parts, prior to a projects decommissioning.  This is critical in order to safeguard and secure long-term financing and market success and ensures that the insurance industry is adding the right level of assistance from the very start.

For insurers too, this is significant – since increased engagement and collaboration raises wider market understanding and reduces risk.  However, there is still some way to go – particularly when it comes to working directly with the major equipment manufacturers.

To date, OEM’s have always viewed the establishment of a relationship with the insurers with considerable caution, since manufacturers are keen to protect sensitive data, keep a cap on trade secrets and not jeopardize future research and development.

However, this need not be the case.  Indeed many of the more entrepreneurial equipment manufacturers have already registered the benefits that the formation of these new relationships can afford.  Benefits that become particular apparent when introducing new technologies that may well offer significant potential but that also bring with them considerable risk – something that often leads to a reluctance for established players to purchase and adopt.

Reducing these barriers to future market growth is therefore key and the impartial endorsement and engagement of an accredited and trusted investment and financial risk assessor may well become the catalyst for future market growth.

15,000 turbines may well be coming out of warranty agreements this year but with the right level of planning, protection and support, opportunities for the future industry growth abound.  The key as ever, is to put partnerships in place.  Now.

The purpose of the GCAC is to provide a platform for renewable energy industry leaders to exchange ideas and develop industry specific best practices for addressing the exposure to financial loss

• Through insurance, loss control contractual risk transfer, alternative risk transfer and other irks management strategies.

• Additionally, the Advisory council will become a platform for members to engage other industry participants such as: lenders, investors, law firms, manufacturers and O&M contractors.

Areas of Discussion for the GCube Advisory Council

• Loss of PTC or ITC in the event of project delay
• Decommissioning insurance / reclamation bond
• Warranty for solar panels
• Insurance to protect against the exposure to curtailment for any reason
• Weather insurance or lack of resource (sun)

Are these areas of concern or interest for you?  Let us know.  Comments

John McLane, President

Welcome to the second edition of The Renewable Insight, our quarterly industry newsletter that keeps you current with the latest GCube and industry news.

The renewable energy marketplace continues to expand and mature in spite of difficulties and hurdles imposed by the global economy, lending markets and regional and local regulators and governmental agencies.  The Annual Energy Outlook in preparation by the US Energy Information Administration forecasts US renewable energy generating capacity will grow 17.3% from year end 2011 (142.6 GW) to year end 2015 (167.3 GW) as approximately 33% of all new generating capacity added in the U.S. is forecasted to be in renewables.  The Annual Energy Outlook takes into consideration the scheduled expiration of existing subsidies.  We have included link to preliminary report below.  The final report will be published soon.

Beyond Federal tax credits, the growth in renewable resources is being driven by state policies, Federal requirements to use biomass-based fuels in private and government transportation, regulations on emissions, and retirement of coal-fired generation.  There is also a very distinct move in commercial and industrial sectors to expand the use of renewable generation as an energy security strategy and hedge against projected price increases in fossil fuels.

The implications for insurance and risk management are significant.

Increased demand for equipment has attracted a significant number of new manufacturers to the renewable energy market.  This price competition has reduced the margins in technical equipment specifications that would otherwise allow for variability in equipment operations.  Additionally, there is a steady introduction of new technology.  Both these developments are reflected in the reliability and availability of equipment – and subsequently, in insurance claims.  It is significant to note the insurance industry has been through this kind of trend in various other power generation technologies and other segments of heavy industry.

This specific issue is leading GCube to develop lines of communication with OEMs to address equipment failure issues and possible solutions and responses so owner/operators are protected.  It has also lead GCube to develop strategic relationships with 7 service providers in the wind industry to improve our ability to address technology issues before a loss event (loss control) and after (loss mitigation).

All of this comes together to shape the insurance underwriter’s perspective on renewable energy – substantial historical growth in the industry and thus premium, tempered by market competition reducing operational tolerances and the introduction of new technologies.  The simple fact is the insurance industry is seeing an increase in the frequency and severity of losses, particularly in the wind industry.

Given that the future for renewable energy remains robust, insurers remain competitive in the market.  However, insuring renewable energy projects is at the point where risk differentiation and prudent underwriting are becoming increasingly important if insurers are to remain a secure counterparty for accepting risks and paying claims.

As we have stated here before, GCube is staffing and building the infrastructure necessary to be able to the job necessary to remain an insurer for the renewable energy industry.  You will see this in the articles and commentary that follow.  You will also see it in your dealings with our people.  We are extremely excited to be a participant in the renewable energy community and look forward to being a contributor to the success of our insureds and their brokers.

John McLane

Read the Annual Energy Outlook Report Here

http://www.eia.gov/forecasts/aeo/er/

Al Caceres

Al Caceres, Senior Vice President Underwriting
GCube Insurance Services, Inc.

Over the past year, Al Caceres has been responsible for leading our US underwriting and account management teams.  During that time, Al has become very familiar with our client’s and their insurance needs.  We sat down with him to discuss some of the challenges and innovations currently facing the renewable energy market.

1. What are the most significant challenges facing the North American markets from an underwriting perspective in 2012?
   Some of the major challenges facing the market include more competition coupled with an increase in capacity.  We have seen a number of new players entering the renewable energy space without having a true understanding of the industry and the risks involved.  In turn we now see low rates and very aggressive terms and conditions; this is juxtaposed to the rate increases currently found in much of the traditional energy market.Another major concern facing the North American market is that much of the operational equipment is old and off warranty while many of the new risks we write utilizes technology that can be classified as prototypical. Aging turbines and lack of proper maintenance has contributed to an increase in of operational wind losses.  An influx of both government and private capital has ramped up production and remodeling of wind turbines and solar equipment by old established manufacturers as well as new entrants into the market, including many from China. Quite often the new risks we see incorporate technology that has been deployed for only a short period of time; warranties may be in place, but inherent risks or defects will take time to surface.

   All the factors outlined make profitability a growing challenge.  While growth of renewable energy has been robust, so has the risk.

2. Are there any key technological or wider industry innovations that you’re particularly excited about?
   In general I am excited about the continual growth of the renewable industry especially the solar segment.  The U.S. installed 1,855 MW (or 1.86 GW) of solar in 2011 and is expected to install a full gigawatt more than that in 2012: 2.8 GW. Two important factors that drove the massive amount of installation in the U.S. were declining module prices and expiring solar power incentives, such as the 1603 Grant in Lieu of Tax Credit which forced developers to begin projects before the end of 2011.
3. What could be done – that currently isn’t – that would provide greater certainty to the wider renewable energy space?
   For starts we as in industry, need to put more emphasis on the manufacturers to stand by their products.  With increase in demand and more and more sites going operational the need for a dependable product is critical.Prior to joining GCube, Al Caceres was a Senior Property Underwriter with AEGIS Insurance Services responsible for underwriting operational and construction projects for power and utility, oil/gas, petrochemical companies and renewable energy projects including wind, solar and ethanol plants.  Previously, Mr. Caceres worked at AIG – World Source Property as Assistant Regional Manager and at Starr Technical Risks Agency Inc. as Senior Property Underwriter.  He began his career at Marsh as a Risk Analyst in the Power and Utilities Division. Mr. Caceres has a Bachelor of Science in Education from Manhattan College and served in the United States Marine Corps.

March 30, 2012

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March 30, 2012

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March 2012

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