Supporting renewable offshore developments
Offshore wind power generation is projected to be one of the most promising renewable energy sources during the next few decades, and the renewable sector as a whole is attracting significant financial expenditure and large-scale investments.
Currently, the coastal regions of the central European countries and China have developed most offshore wind farms. However, offshore wind developments are seen as more and more attractive in emerging markets such as the US East Coast, Japan, Brazil and in the Far East countries. Nordic developers and suppliers are likely to be involved across the entire globe in the years to come. However, the rate of return for many of these projects are reported to be marginal and up to now many of the developments have been pending Contract for Difference i.e. subsidies to materialise.
The war in Ukraine, followed by the energy shortage in Europe, has in the last year
triggered political ambitions beyond what local consenting authorities and the supplier markets could realistically deliver.
With shortages in the supply chain and significant inflation, the offshore wind power market is foreseen to be a marginal business for developers also in the next few years to come. To improve profitability, there has been an extreme push towards developing new technology which has resulted in a constant upgrade of turbines or new turbine platforms with increased capacity. This development is now resulting in larger turbines that are pushing other related development activities and we see larger foundations, high voltage alternating current (HVAC) and high voltage direct current (HVDC) cables with increasing capacities, and fierce competition to secure construction vessels with the right capacity for both foundations and wind turbines.
Additionally, we are also seeing the development of new wind parks in deeper waters with significantly longer export cables from source to grid connection as the acreage near consumers becomes less available. Consenting authorities and suppliers are important enablers for these projects, but financing institutions and insurers are also significant players if a project is to reach a final investment decision (FID). At If Insurance, we believe in innovation and we understand that it is a necessity for the industry to develop at speed to be profitable. Insurers must also be bold enough to support clients that are entering this new energy market.
In this buoyant market, we will strive to support our clients (both developers and suppliers), but it is imperative that projects are implemented with good cooperation, excellent risk management and full client/insurer risk transparency. In this article we will share our expectations for such constructive cooperation.
The activities required for developing an offshore wind farm include many stages, and a significant and rapid technology race is required if a project is to become profitable. There are a few well established offshore wind farm developers and oil and gas (O&G) majors with significant technology and project experience that are now entering the developer market, together with traditional O&G suppliers that have already shifted to a focus on renewables. However, there is a lack of personnel with experience in this booming market and there are many newcomers in the industry, both on the supplier side and on the developer side, who may be more exposed to incidents and delays. Below, we would like to share how If is assessing the risks for these projects as well as the mitigating actions that would improve the risk management for these projects.
Although there is still only a small historical number of claims in offshore wind development, when compared to other complex projects, the most common claims and losses are concentrated in the construction phase, and cable issues have by far led to the most frequent and costly incidents. About 40% of reported insurance incidents are related to cables and about 80% of the costs are related to cable incidents. Significant learnings have been taken from these reported incidents, so the majority of future incidents and associated costs may shift to other areas. To that end, at If we have developed a risk assessment methodology to ensure a systematic approach with a holistic view for risk evaluation of new projects. However, we are not forgetting that the devil is in the details, and that the incidents tend to materialise at the sharp end of a project development.
Our approach focuses on key elements in a project development as illustrated below, and it is understood that projects and organisations with good governance systems will be in an optimal position for success. Our process is therefore to evaluate both management, governance and technical building blocks for the project at hand, and it is evaluated against predefined requirements and scored in a consistent way based on the project information available when If is asked to tender or engage in these projects.
In this article, we will not focus on details for each technical building block, but rather focus on the importance of building the right project governance, ensuring that the right design considerations are in place and understood. These include technical requirements, a clear design basis, soil and environmental conditions, verification activities, change handling and technology development when new concepts and technologies are introduced. Finally, we also wish to address the importance of technology qualification programs and third-party verification at the critical points of the project execution.
Our client may be a developer, a turnkey contractor or a component or systems supplier, and in all cases, it is important to understand the status of the client or customer. It is fair to assume that a professional developer and / or supplier with an extensive operational experience and track record will deal with a project more professionally and with less risks than an untrained party with less experience. Good management systems are something most clients will argue that they have, but the importance of early planning, leadership commitments and the experience of individuals may offset the effect of good generic governance systems, causing schedule problems and late changes which again may lead to incidents.
Focus on management systems, project planning, supply chain management, quality and risk management (QRM) activities, interface handling, management of change, engineering, construction, and completion activities are of such critical importance that we encourage early dialogue with our clients to ensure that we can promptly share our expectations and experience on these topics.
Unclear scope, opaque design assumptions and vague requirements often trigger project changes and non-conformance requests late in a project and these issues are also often followed by cost and/or scheduling consequences. This could give rise to the potential for unconservative design or nonconservative operational criteria or methods, which again could lead to situations triggering incidents that result in insurance claims.
It should be noted that many design or incident issues are related to what clients claim as ‘unforeseen’ soil conditions or ‘extreme’ environmental situations. High quality design documentation for soil and environmental conditions should therefore be seen as very positive risk mitigation in project developments.
It is viewed by If as mandatory that unambiguous design requirements should exist and that there is information in the project documentation that lists applicable rules, regulations, technical requirements, and design basis stating local environmental conditions, potential natural hazard and site-specific geotechnical soil design parameters, including interpretation and integration of geophysical data, in-situ test data and advance laboratory strength and deformation parameters.
Third-party verification and transparency
Most of the new energy projects are project financed and a Lenders Technical Advisor (LTA) is normally appointed by the developer early in the planning phase to ensure that the project is bankable. The LTA representatives ensure that the project is designed according to industry standards, and they are looking for ‘loopholes’ and ‘doomsday’ scenarios that could result in cost overruns and/or schedule delays that could threaten the project profitability, causing a potential default of loans. The third-party services carried out by certification agencies and LTAs are aimed at confirming that a design is in compliance with specified rules, codes, standards and good industry practice.
However, new technology and innovation does not necessarily meet the criteria of good industry standards simply because it has not been done earlier, and it is therefore required with a Technology Qualification Program (TQP) to provide evidence that the technology will ‘do what it says’, i.e., that it will function as promised within the specified conditions. In this context, it is important that there is transparent cooperation and the insurer may have another angle on the risk than the developer, certification authority and the LTA.
The certification authority(ies), the LTA, the financing institutions and the insurers are all project enablers that are required to reach FID. Developers are therefore encouraged to establish an early, open and transparent cooperation with all these parties to warrant a common risk understanding.
Technology qualification programs (tqp) and strategic partners
Most electrical components and turbines are subject to certifications and elaborate qualification programs that takes years to conduct to ensure that these products are ready and fit for use over the operational lifetime in the field. Manufacturers in this line of business have gained considerable experience and now diligently follow these routines to comply with contractual warranty requirements.
However, new technology development for the project phase, for example when it comes to new vessels and mission equipment, do not necessarily have the same system in place, as there would be a need for purpose made TQPs. There are good guidelines for such processes like the DnV recommended practice for technology qualification programs, DNV-RP-A203 and Lloyd Register’s Guidance Notes for Certification through Technology Qualification, and others for such TQPs, but it really takes management involvement to see this through in a good way.
To provide evidence that the technology will ‘do what it says’, i.e., that it will function as promised within the specified conditions without the appearance of unknown inherent risk(s) that may cause incidents during installation, commissioning and operations, requires both perseverence and a systematic approach. It is evident that introducing new and ‘untested’ solutions will be both a costly and a lengthy (potentially multi-year) process, and with the current market situations it is difficult for such developments without an early contract or a strategic partnership between developers and suppliers.
It is possible to do innovations on a single contract basis, but If believes that strategic collaborations and open dialogue will deliver the safest and most competitive development in the long run and we would judge such agreements as a risk mitigating factor.
Marine warranty survey
Incidents happen on projects either during installation, commissioning, or operations, and many of the reported claims are noted to be caused by ‘poor workmanship’. However, it could be argued that the root cause for many of these claims are more related to lack of experience, training, and detailed operational procedures. For that reason, it is imperative for Marine Warranty Surveys to review both operational procedures and to oversee actual installation operations. If’s requirements to Marine Warranty Survey (MWS) are that they shall follow the Joint Natural Resources Committee (previously Joint Rig Committee, JRC) Code of Practice (COP) for Marine Warranty Surveyors.
There could be some minor adjustments in the scope presented in the COP so that it is fit for the project at hand. If will encourage dialogue with both the client and the MWS on this topic well ahead of project execution to agree appropriate adjustments to the scope of work based on identified prevailing risks, experiences, and the nature of the project. The fundamental objective for If is that the MWS make their best effort to ensure that the risks associated with the warranted operations are reduced to an acceptable level, in accordance with project requirements and best industry practice.
If will reserve the right to approve and / or endorse both the Marine Warranty Surveyor supplier and the appointed MWS individual(s) for the actual work. We will request that the JRC ‘Marine Warranty Surveyor Information Form’ is used in the process, and we will tailor the experience requirements for the nominated surveyor to ensure the right experience for the various installation tasks.
If’s ambitions are to support Nordic developers and suppliers in the energy transition from fossil fuels to green energy. The offshore wind power generation is considered one of the most promising renewable energy sources for the next decades and it is likely that Nordic developers and suppliers will be present across the entire globe on such projects in the years to come.
The war in Ukraine and the following energy shortage in Europe has triggered political ambitions beyond what the market realistically can deliver in the short term due to volatility, high inflation, and supplier shortage in several sectors.
In this article we have summed up If’s view on the risk picture and presented the expectations we have to our clients and stressed the need for cooperation and transparency. The best place for an insurer to be is working side-by-side with our client to find the solutions that will help them grow. The holistic approach described is used by If when assessing risk for wind farm developments, interconnector cables and for electrification projects related to O&G activities.
We focus on general principles and encourage our clients to engage in early dialogue related to renewable and green industry initiatives. We believe in building trust and sharing information with our clients and partners to ensure safe and incident free projects.