Adam Hearn, Senior Underwriter, and Josh Shimali, Underwriter, discuss how project values are reducing, as components are priced more competitively, and discuss a few misconceptions about how changes in project value affect typical exposure to losses.
How have renewable energy asset values fallen over the past few years?
Josh: Existing project values are often reduced as they are benchmarked against new equipment coming to market which has greater output capacity, meaning, on a kW/MW basis, fewer panels and turbines are needed to maintain overall site output in the event of partial or total rebuild. However, by how much project values have gone down is pretty inconsistent across the industry.
Adam: Absolutely. In 2015, the cost of most projects was consistently between 1 and 1.2 million USD per MW, whereas now, we see similar projects, using the same technology, in the same region, even from the same developer, with significant variation in values.
Josh: In conversations with our insureds, this variation in values can sometimes pose a challenge when discussing the premium. For example, one of our insured developers had already underwritten a solar project in the Netherlands with us for €600,000 per MW. A few weeks later, they came to us with another Dutch solar project of equivalent size and design, which, based on a deal struck with the manufacturer at that point in time to reduce the price of the contract, they had valued at €300,000 per MW.
When it comes to underwriting these assets, how much the project costs to build is only one factor when calculating the premium. We also have to consider what the cost of the likely or expected losses will be in the event of damage to or failure of equipment.
Doesn’t reduction in value and cost have a knock-on effect on insurance?
Adam: What typically happens in a given industry is, when the values go down, so do premiums. However, within the renewable energy industry, rates have been incredibly low for the past few years. As premiums ultimately build a “pot” to cover future claims, this has meant the pot has been too small to cover the overall quantum of losses. This is a contributing factor as to why a number of insurers have closed their renewable energy books. Ultimately, for insurance firms to continue underwriting projects, the rates have had to increase for the industry to survive.
Josh: Another factor that has led to rates increasing is the high attritional loss rate that’s a mainstay for the industry – even if the overall project value goes down, the number of losses that are occurring do not reduce and nor does the average value of losses, especially since the risk of extreme weather events and mechanical breakdown events do not reduce in line with reduction in value.
If project values go down because technology is cheaper per MW, wouldn’t this lead to a lower premium?
Josh: Replacing a single turbine or small percentage of panels is often more expensive than a bulk order made when projects are constructed, especially since pricing is more competitive when an OEM is tendering for the supply contract. So, when we handle a typical claim, since we only usually replace a small portion of the overall project value, or even constituent parts of the asset, the cost can be much higher than the original cost to build would indicate.
Adam: Paradoxically, the same trends that lead to project values going down, that is, the evolution of technology for increased capacity and size, also make them more expensive to replace. Looking at blades, for example, it’s logistically harder to replace a blade that’s 60m compared to 25m, and ultimately, means a greater cost is incurred to manufacture and transport a replacement.
What can insured clients do to ensure accurate values are submitted to Underwriters?
Adam: We’ve seen a few cases where re-evaluation has been undertaken with an ultimate goal to reduce premiums, However, Underwriters will require a premium to reflect the risk, therefore the original rate used in calculating the premium may need to increase to sustain the premium levels. Of course, we are happy to support clients in a reasonable re-evaluation of their projects. At GCube, we will often sense check values with qualified, independent third-party appraisal and valuation firms.
Josh: One thing that always helps in any negotiation around your project’s premium is getting in touch in touch with O&M and construction partners. Information about contract price to build 30 turbines is useful, but knowing what the OEM will charge for one turbine is even more helpful for assessing what the right premium should be. If clients can get cost of replacement and length of replacement time in writing, that can go far in supporting a new premium.