Wind energy is becoming one of the most widely used sources of renewable energy. In fact, according to the American Wind Energy Association, the wind energy industry has added more than 35 percent of all the new power generating capacity since 2007. As the industry grows in popularity, new developers continue to enter the market, and existing developers may likely expand their investments in wind farms.
As developers know, constructing a wind farm is a multi-step, complex process where each phase, from site selection to maintenance and operations, necessitates attention to detail. But those immersed in the industry understand that the risks come from every direction and at every stage, even before the first blade turns, to capture energy from the wind.
To cope with those risks, it is critical that wind farm developers find insurance that addresses the unique exposures of their business. Their goal in choosing an insurer should be the seamless delivery of coverage that helps them manage risk throughout the lifecycle of operation.
Site Location and Assessment
The success of a wind farm relies upon the availability and the speed of wind. Small variations in average wind speed over time can make a significant difference in the energy output of a farm. As a result, an early stage of most projects is to assess the wind conditions at a potential site, often for a year or more. Conducting these feasibility studies helps assess the potential energy output of the location. These evaluations necessitate a one-to-two year time commitment and are conducted through on-site installation of meteorological towers (met towers).
Met towers, often soaring 130 to 165 feet in the air, are valuable assets, and can be subject to a variety of exposures from weather (lightning, wind, snow and ice) to fire, vandalism and even collapse. In case of damage, insurance protection during construction such as a builders risk or installation floater, or a scheduled property floater policy (later on) are extremely important.
In addition to exposures for the physical property, potential liability exposures should also be examined to determine if updates are needed to existing insurance coverages. There may be modifications to the property in order to set up operations for the wind farm, such as erecting the turbines in an area close to other structures, or building upon vacant land. The developer should review the following factors involved in the site selection process, including:
- Accessibility: Wind farms are often built on mountainous terrain or in remote areas, so consider the accessibility of the operation. Having an adequate roadway infrastructure in place can help ensure that the site is safely accessible to workers, heavy equipment and emergency responders.
- Environmental analysis: It is important to review the environmental impact of the development and construction of the wind farm at the chosen location. This analysis assesses whether the wind farm will affect the flying patterns of migratory birds, wildlife, endangered species and plants and soil.
- Floods and earthquakes: The site should be assessed for potential floods and earthquakes. Building a farm in an area prone to these hazards can significantly affect the farm and the wind turbines in the long-run.
- Grid and infrastructure: Ensure that there is adequate capacity to handle additional load from wind farm output.
Contracts and Agreements
As typical with any major development project, there are a number of contracts and agreements that will be necessary. Once the site has been selected and the land has been analyzed, project owners will turn their attention to the power purchase agreement (PPA), which is the detailed agreement between the owner and operators of the farm and the energy buyer. This agreement sets forth the price, expected production and overall expectations for the energy being bought and sold.
The PPA also includes other important information such as liability for all involved parties, insurance coverage requirements and a waiver of subrogation. Each contract is unique, and could contain other important clauses, including different types of required insurance coverages. Having the right insurance and bonds in place is critical, as financing agreements are often contingent on both. Involving legal counsel in all contractual matters is also important.
Another important contract is the interconnection agreement which outlines terms and conditions that dictate how the wind farm’s system can be connected to the utility grid. Both the PPA and the interconnection agreement are just two examples of key contracts developers may need to enter into.
Developers can work with their insurance agents to make sure they are reviewing all the necessary contracts and agreements with a true risk management eye. Other important agreements and contracts to be aware of and pay attention to include the sales agreement, construction contract, warrantees and the operations and maintenance agreements.
Permits and Ordinances
The process of securing a permit for the wind farm can be complicated and have a significant effect on the timing, cost and location of the operation. Developers can begin the process of securing permits once the environmental analysis progresses favorably.
The local zoning ordinances can vary vastly between locations, and continue to change as the wind energy industry evolves and grows. It is important to know about local zoning ordinances so that permits can be secured for all operations from assessments to construction.
Turbines and Component Parts — Manufacture and Transport
The next key step is to purchase the right type of wind turbine components, transport them and install them for safe operation. Nacelles can weigh more than 50 tons, blades can be 150 feet in length, and the tower sections also present unique challenges for securing and transportation. When considering manufacturers, owners should review how liability and property exposures can change during this phase and remain cautious about non-certified or prototype turbines because they may not have been certified by qualified third parties. Additionally, ensure that industry standards are met for specific components such as electrical and mechanical parts and the foundations. Working with a manufacturer with a strong track record of exceeding industry standards when producing components can have a positive impact on the reliability and life of the turbine equipment.
Because of their immense size, transporting wind turbines can be a logistical challenge, adding another layer of complexity. During the transportation process, developers should be aware of exposures like property damage, construction delays, auto liability and workers compensation. At any point during transit, the equipment can be damaged or cause damage to the property of others. Working with experienced shippers in the wind energy industry who understand the specialized hauling required for this type of cargo can reduce transportation risks.
Some turbine components may be manufactured overseas, so developers should actively work with their insurance agents to identify any coverage gaps and have the right insurance coverage to protect potential property and casualty exposures when transporting equipment from other countries across oceans.
There may be issues that develop at the construction site. Experienced construction contractors can help developers make sure the appropriate safety and risk management procedures are being followed throughout the process. Similar to the process for engaging haulers, the wind farm developer will want to select a construction firm with experience and proper insurance coverage. In addition, the developer should examine options for his own coverage beyond general liability, including equipment replacement.
Wind Farm Operations and Maintenance
Wind farm developers should make certain that the operations and maintenance (O&M) contracts and procedures are in place during the construction process. These contracts play a significant role in making sure the output and life of the turbine meets expectations. O&M contracts can be very specific and must be reviewed carefully to ensure that the turbine is being properly maintained.
The performance of routine and planned maintenance and the protection of the turbines are the main functions of the O&M team. Turbine equipment such as gear box components, tower metal, fasteners and the blades are subject to wear and tear. Proper maintenance can help make a difference in the safety, longevity and production of each turbine.
Business Protection & Insurance Coverage
The power purchase agreement sets forth the requirements for the delivery of a certain capacity over the course of a year. Having business interruption coverage in place can help a company if the output is less, due to damage from a covered peril.
In addition, many wind farm developers depend on federal or state tax incentives and grants to make their operations financially feasible. If business is interrupted, the cash flow from these sources may stop, putting a large hole in a company’s bottom line.
By purchasing insurance that protects the company when operations are halted temporarily, a wind farm owner has more security to face the unexpected.
Making the Best Choice
As wind farm developers consider the risks they face, the array of insurance products and services available can be confusing to sort through. The following are three guidelines for making a choice that maximizes the value of an insurance purchase.
- Life-cycle coverage. Owners and developers should work with an insurer who provides coverage for the wind farm through each stage of development to streamline the risk management process. Using different insurers for each stage could result in coverage gaps.
- Small-to-large appetite. As the industry grows, developers may look at new opportunities to build on the success of their wind operations. Working with an insurer who can cover wind farms of all sizes can help the relationship grow as the business expands.
- Range of solutions. Working with an insurer like Travelers with expertise in the renewable energy industry is important. This encompasses having an insurance team of professionals, including underwriters who understand the business in depth so they can assess risks accurately and deliver competitive premium rates; risk control advisors with the experience to provide sound guidance on best practices; and claim professionals who understand the losses common to the industry and can speed claims along.
The wind energy industry is on a path to significant growth and those who are a part of the industry or looking to join the industry face a number of decisions. One of the most important considerations is having a plan to manage exposure and minimize risk. By working with an insurance carrier and an agent with extensive renewable energy experience, developers can ensure that they have the right insurance coverage and risk management best practices in place to help build a successful business.
Lauren Cutro Berry is the Chief Business Development Officer for the Inland Marine division of Travelers. She can be reached at [email protected].