Australian Offshore Wind - Ambitious plans ahead

On 4 March, 2022, the Victorian State Government revealed its audacious plan to spearhead energy reform with a plan of action to procure large-scale offshore wind energy projects to an enormous scale of 13GW. It is evident that the government’s ambitions to create energy industry jobs, power homes with clean energy and meet net zero emissions targets are high on the 2050 net-zero greenhouse emissions agenda – particularly given that the first offshore wind project is likely to be located here in Victoria.

In its Offshore Wind Policy Directions Paper (opens a new window), the government of Victoria pledges to support the establishment and growth of this emerging industry by committing to a 2032 offshore wind target of at least 2GW. First power is planned to be achieved by 2028, following a competitive bidding process. To solidify this long-term commitment to offshore wind, Victoria is also setting targets to reach 4GW of offshore operational wind capacity by 2035, increasing to 9GW by 2040.

In order to meet the government’s net-zero emissions by 2050 target, Victoria will need to install approx. 15 times its current renewable energy generation capacity. The plan is for 20 percent of the 2050 energy capacity to come from up to 13GW of offshore wind power generation – a daring but achievable plan. Whilst the release of the Directions Paper is a strong start, comprehensive details of a rollout plan are still lacking. Considerations as to how Victoria’s policy dovetails with the Federal framework and where these projects are to be located (near shore or far from shore) will need to be at the forefront of any feasibility studies and public consultation discussions.

Further details of the plan are to be released later in 2022, however, Lockton would like to take the opportunity to inform its clients who are considering projects in these areas of some of the key risk considerations in need of contemplation as part of the normal project due diligence undertaking.

Risk considerations

Offshore wind inherently has a higher wind generation potential than its onshore counterparts and therefore location of a proposed project is essential for bankable, project returns. It is common for a feasibility assessment to be conducted as part of the early feasibility process and this should also include project risk considerations such as inclement weather windows that could affect construction timelines and the ever-increasing occurrence of natural catastrophes such as windstorms and hailstorms due to climate change.

Offshore wind can be considered a mature process in much of the UK and North-eastern Europe, which is home to more than 35GW of the current world’s total installed offshore wind capacity. Therefore, many lessons on inherent risks have been realised, some of the more pertinent ones include:

  • Turbines can suffer from gearbox failures which can be associated with costly serial losses and fires.

  • Cable failure is a common concern (approx. 40 percent of construction insurance claims between 2005 and 2020) and is often caused by the utilisation of fixed price Original Equipment Manufacturer (OEM) contracts and Engineering, Procurement and Construction (EPC) frameworks which tend to result in cost-cutting and poor installation, workmanship and design.

  • Small availability of specialist cable vessels for installation and repairs (which may require additional licensing), particularly given most come from Europe or Asia lead to extensive costs.

  • Lightning strikes causing blade delamination and resultant cracking.

  • Seabed characteristics for fixed foundation turbines and potential for mobility.

  • Inclement weather conditions (including windstorms) have resulted in turbine collapses and shipping delays of critical parts.

  • Offshore turbines have a higher maintenance cost due to corrosion from sea water and accessibility issues.

  • Regulatory issues and complaints (also known as “Aesthetic pollution”) in which residents have hamstrung projects getting off the ground due to suggested property devaluation and nuisance claims.

It is apparent that like many other forms of renewable energy technologies, offshore wind is not without a weave of complex and intricate risks. With this in mind, it is advised that expert risk consultants who have close ties to the insurance and alternative capital markets be involved from the very beginning of feasibility stage, i.e. preliminary design all the way through to commercial operations. This will help facilitate the risk identification and transfer process to the insurance market, discussed further below, who will help the envisaged projects achieve ultimate bankability.

Financing inherent project risks

For the government’s offshore wind rollout to be successful, the project’s need to be able to garner project financing and therefore must be bankable. To help facilitate this bankability requirement, adequate and efficient risk financing and insurability will be pivotal.

Insurers, particularly European insurers, like to have line of sight of the potential claims that may arise from an offshore wind’s project risks. This is further complicated on renewables due to the fast and ever-evolving innovation which is occurring at record tempo. It is therefore imperative that insurers keep pace with international engineering standards, technological advancements, as well as equipment certifications (i.e. type certification requirements etc.) to ensure they’re at the forefront of understanding and managing risks in the industry.

To assist clients in appreciating common insurer concerns with respect to offshore wind, below we have listed some of these key concerns that underwriters will undoubtedly raise as part of their due diligence process.

Risks insurers are most concerned about:

  • Prototypical / untested equipment such as specialised, larger diameter blades and higher tower heights which can result in higher dynamic loads increasing rotor blade stress

  • Climate change and ever-increasing natural hazards occurrence and severity

  • Turbine gearbox failures

  • Subsea cables (loss and damage during transportation and installation)

  • Logistics of OEM (i.e. installation and repair vessel availability – particularly during inclement weather periods)

  • OEM and EPC Contractor selection – Tier 1 preferred (poorly experienced contractors can affect installation and maintenance quality, technology quality and project returns)

  • Cyber Attacks on critical project infrastructures (substations etc.)

  • Delay in Start Up / Business interruption quantum and exposure (incl. supply chain disruption and time to replace critical project items)

Offshore wind projects are likely to face more scrutiny because of the potentially higher claims costs driven by the inherent technological challenges and complicated logistics. Projects are, and will continue to be, underwritten on a case-by-case basis and therefore it is critical to involve proposed lead insurers at the earliest possible time in the project’s lifecycle to assist developers in understanding the aforementioned risks and their likely impact on insurability.

Risk Transfer Placement challenges

Based on our broad, global experience with placing offshore projects, we typically see the following challenges when placing such projects into the insurance market:

  • Offshore losses tend to be frequent and can be severe (offshore cabling particularly).

  • Risk engineering standards – technologies continue to evolve so close monitoring of sector specific engineering standards need to be adhered to.

  • Offshore wind projects are complex and can have multiple interface issues and therefore require detailed analysis and longer underwriting timeframes.

  • Capacity for offshore insurance is more limited than for onshore projects, particularly given there is a dearth of local insurer capacity here in Australia. This may change as offshore generation becomes more prevalent but for now it’s natural Australia is an immature offshore insurance market with little expertise to draw upon.

  • Given the lack of experience, domestic insurers will more often than not need to refer any underwriting decisions back to HQ’s in Europe or the UK, resulting in much longer underwriting timeframes.

With the above in mind, the provision of detailed project information is key and generally we would propose that at a bare minimum, the following underwriting information be provided at the earliest:

  • Proven track record of the developers including its main contractors and OEM’s

  • Detailed project layout including third party interfaces

  • Detailed Project Programme Chart – level 2 or above

  • Comprehensive breakdown of project values including financial models for consequential loss insurances, if procured

  • Project Due Diligence Reports, including feasibility, technical and environmental

  • Wind speed assessments

  • Marine transit route analysis and survey’s

Conclusion

It is a widely accepted reality that securing comprehensive insurance protection for large offshore wind projects requires the early involvement of key lead insurers, both domestically (if available) and internationally. This can make the process of insurance procurement complex and time consuming – an important consideration when there are tight timelines with respect to project financing requirements. There is also possibility for innovative alternative risk transfer solutions to be used in order to not only assist with project bankability, but to also complement the typical indemnity-based insurance solutions that are customarily procured. When utilised and structured correctly, these ART solutions can help improve the overall risk management framework of any given project and even increase the project’s internal rate of return.

It is therefore imperative that Sponsors and Developers utilise an experienced insurance advisor and broker who not only understands the particular and inherent risks in offshore wind projects, but who also has the right relationships in the domestic and international insurance markets. The ability for your insurance advisor to ‘sell’ the risk and advocate favourably on your behalf will be key to achieving insurability and ultimate bankability on any given project.

For further information, please do not hesitate to contact: Corey Tidey (opens a new window) and Ranga Jayaratne (opens a new window)