Considerations for Wind Energy

The UK government has committed to deliver at least 15 per cent of its energy demands from renewable sources by 2020, with Northern Ireland and Scotland setting their own targets even higher. As the shift to alternative sources of energy continues to be a growing trend, investments in wind energy have become increasingly prevalent.

While wind power as an energy source receives a great deal of attention, it also brings a complicated combination of risks, both financial and commercial. Manufacturers, developers, contractors, designers, operators and investors all need take the risks into account to ensure that you have an ample risk management plan for this ever-changing territory.

Estimating Your Risk

Wind turbines are a sizable investment with the potential for huge losses. To sufficiently protect your investment, you must identify the unique sets of risks you will face during every phase, including contracting, construction and ongoing operations.

You must first determine the feasibility of the project, weighing construction and technology, payment, operation, maintenance, financial, political and sponsorship risks against financial projections and potential revenue stream.

A practical plan of grid interconnection, dispatch, wheeling and sale of wind power requires a substantial amount of cooperation on both small and large scales.

Realistically estimating your risk when becoming involved in a wind project will allow you to mitigate it and successfully protect your investment.

Construction Risks

Unique risks that wind farms face during their construction include the following:

  • Cost overrun
  • Delays
  • Start-up and testing problems
  • Contract and payment defaults
  • Hidden defects
  • Force majeure (catastrophic event)

These risks can be mitigated using contractual agreements and associated guarantees, contingency funds, and lines of credit and insurance cover.

Operational Risks

Upon beginning commercial operations, operators must analyse the many exposures and risks they face. Such risks include:

  • Operating efficiency problems
  • Routine operation and maintenance problems
  • Major operation and maintenance problems
  • Fall in market demand or pricing
  • Input availability
  • Force majeure (catastrophic event)

However, contractual arrangements, contingency reserves, cash traps, insurance and other risk compensation devices can be used to mitigate these risks.In general, the greatest drivers of exposure facing wind farms are property and equipment breakdown. For example, a blade failure can lead to significant losses. Claims can reach hundreds of thousands of pounds when one considers the cost of the crane, crew and materials needed to repair or replace the blade.Beyond property and equipment breakdown, the very nature of wind energy also poses operational risks.

Wind is sporadic and unpredictable, which means wind turbines are never perpetually active. Instead, they capture energy only about 70 to 85 per cent of the time. The variability of wind energy necessitates careful planning such as using energy storage systems or developing a ‘smart grid’ that distributes power to multiple sources according to demand. An energy storage system or smart grid will help offset low productivity when the wind is not blowing and help operators coordinate unstable output.

Health and Safety Considerations

Because wind turbines require regular access for maintenance, workers are routinely exposed to the hazards of working from height, slips and trips, contact with moving machinery, construction in very windy conditions and the possibility of electrocution. Offshore construction presents an expanded set of hazards related to large waves, diving activities, constructing turbines at sea and using very large jack-up boats to situate a turbine. Both onshore and offshore turbines carry risks of piloting boats or helicopters in a harsh environment.

Due to their height and composition, turbines may also be struck by lightning, possibly causing damage or fire. In the rare event of damage or structural failure, turbine blades or their fragments can travel considerable distances.

Support in Your Endeavour

Recent dramatic growth in this sector suggests that wind projects can be profitable endeavours, but the general lack of experience by sponsors, operators and insurers creates an especially precarious position for an investor. Wind projects are not competitive with least-cost alternatives in most markets, meaning some price-support mechanism is usually required.

To discuss your risk transfer options when planning and operating a wind farm, contact the insurance professionals at Gen2 Natural Resources, who will help you assess your risks and needs at every stage of the project and also help you secure the appropriate cover.

Call us on 0330 056 3665 or email us at naturalresources@gen2group.co.uk for more information.