A stormy day on the North Sea. A large ship gets into trouble. The high swells hurl it against the transformer platform of an offshore wind farm, sinking it. Power from the wind farm to the mainland is cut off for months. A worst case scenario. Read more about the risks and opportunities involved in offshore wind power.
A total loss with far-reaching consequences: The electricity can no longer be transmitted, and the wind energy production must be shut down. Perhaps for a period of months. After all, it can take an extensive amount of time to erect a new platform on the high seas: Elaborate advance work must be done to schedule the use of costly special ships and equipment. The high-seas operation may be delayed over and over again as a result of bad weather. Added to the high production costs of a new offshore platform are the financial losses resulting from the extended halt of electricity production. “When an entire platform sinks into the sea, we face a classic worst case scenario. In such cases, we are talking about potential property losses of € 50 million to € 60 million as well as a nine-digit loss of income,” says Gerhard Müller, Senior Risk Consultant at Allianz Global Corporate & Specialty (AGCS). Gerhard Müller knows what he is talking about: Every day he works on risk management in the area of wind power stations. The market for these systems is currently experiencing a boom.
Germany is a good example. The Amended Renewable Energies Act of 2009 has set very ambitious goals for the country: By 2020, 30 percent of electricity should come from renewable energies. Robert Maurer, Global Head of Renew able Energies Underwriting at AGCS, is convinced that wind power will play a key role in this drive: “Wind power stations represent a real alternative to nuclear power plants because they can produce sufficient amounts of electricity. For this reason, wind energy has the greatest potential of all re newable energies – particularly from a cost-benefit perspective.”
Wind power systems riding a tailwind
According to the World Wind Energy Association (WWEA), about 175,000 megawatts (MW) of energy are now being produced by wind power stations around the world. The leading producers are the United States, China and Germany.
In Europe, the wind power expansion is moving out to sea. The lucrative sites for wind farms on the mainland (onshore) are almost completely occupied, and the existing wind power stations can be made more productive only through repowering, that is, replacing the units with more efficient ones. For this reason, the future of wind energy in Europe lies offshore: Huge wind farms with high-performance wind turbines of up to seven MW are being erected off the coasts of many European countries. The lion’s share of the farms is being built by Great Britain, Denmark, the Netherlands, Sweden and Germany.
Unlike other European countries, Germany faces special challenges in its push to construct offshore units in the North and Baltic Seas. These are challenges that other countries could also face in the future if they decided to use new coastal regions for offshore wind farms. In Germany, wind farms are being erected on the high seas: The wind power units can be located up to 100 nautical miles off the German coast where the water can reach a depth of 60 meters. This makes the erection of offshore wind farms logistically difficult and financially expensive – even for market leaders like Siemens. Even though the company has built 16 offshore wind farms around the world over the past 20 years and gained broad expertise in the process, Martin Eckert, Senior Insurance Consultant at Siemens Financial Services, does not play down the problems associated with offshore systems: “The greater the distance from the coast, the longer it takes to make repair and maintenance trips – and the tighter the time frame for such work. Hard bedrock, great depths, strong currents and heavy swells continue to make the project planning and implementation highly challenging.” It is much easier and more economical to build wind farms near the coast, Eckert says. “The problem is people’s acceptance of wind farms: All Germans support renewable energies, but none of them wants to have a wind turbine within eyesight,” says Robert Maurer. “We also face a similar problem in terms of expanding the grids that will transmit green electricity from wind power units to consumers in southern and central Germany. No one wants to have transmission lines running in front of their own windows.”
An expensive undertaking
Given the distance of wind farms from the German coast, a tremendous effort and much money are required to build and maintain offshore units. “Logistics are the main driver of the extensive service and repair costs on the high seas,” Gerhard Müller says. “Let’s take a turbine breakdown as an example. It will cost the operator €1 million to replace the turbine for repair purposes. But leasing special ships for this job will cost many times this amount depending on avail - ability and the weather.” This means that insurance companies that cover the damages face the critical challenge of quantifying the risks and the maximum loss in advance. This is not a simple job. After all, Germany is a pioneer in the operation of offshore wind farms: “It is possible to insure an offshore wind farm. But you have to take the wear-and-tear factor into consideration as well,” says Robert Maurer. “If a wind power unit is damaged after 10 years of operation, the insurance will be paid only on a pro rata basis be cause the unit has experienced extensive wear and tear.”
But how can the potential wear and tear of a high-seas system be estimated in advance? In addition to typical operation-related wear and tear, consideration must also be given to the impact of important environmental factors: Powerful storms, heavy swells and highly corrosive salt water can cause individual parts in wind power stations to wear much faster than in an onshore system. Manufacturers maintain that state-of-the-art offshore wind power stations can operate for 20 years. But Gerhard Müller is rather skeptical of such assertions: “We don’t think that a wind power station will have a 20-year lifespan without a suitable maintenance plan. After all, the lifespan primarily depends on maintenance and the replacement of parts in the station. This means one thing: If parts are regularly replaced, the lifespan of the station will be extended. But this requires a tremendous effort and is expensive, thus reducing the return on investment.”
Consolidation process in the wind energy market
High costs are the Achilles’ heel of offshore wind farms. Building such a farm requires an investment of hundreds of millions of euros. And there is no ceiling on how high these costs can climb. A joint venture of RWE Innogy, Siemens and Stadtwerke München has erected the largest-ever offshore wind farm, consisting of 160 stations, off the coast of Wales. The price tag: more than €2 billion. It is no wonder that international corporations are gaining a bigger say in this complex business, Robert Maurer says. “A consolidation process is sweeping through the wind energy market right now: More and more major corporations like Siemens, GE and Goldwind, the Chinese market leader in this area, are acquiring small and mid-sized companies in order to offer a complete service package from a single source,” he says. “Large corporations also bring more credibility to the table in major projects: Investors like to rely on well-known names in the industrial world because they can make long-term guarantee commitments. And these global groups are completely aware of the risks associated with an offshore wind power station.”
Siemens, for instance, draws on its experience to minimize risks: “For offshore wind projects in particular, risk management is closely linked to the breadth of supplier contracts and service-level agreements,” says Martin Eckert of Siemens Financial Services. “The previous projects and the maintenance agreements related to them primarily cover the offshore wind turbines and, thus, the technical area above the water line. The tendency to assume turnkey agreements for wind farms and the grid connection creates significantly higher requirements for risk management. At Siemens, the experience of other units in the Energy division can be drawn on in this regard.” For insurers, the fast growth of the offshore industry and the matured risk management employed by major corporations mean larger challenges for the array of highsea risks, Martin Eckert says. “We will need other creative concepts in the future,” he notes. “Insurers will need to actively encourage a risk transfer independent of property damages for weather risks, the non-avail - ability of special ships or return and modification costs resulting from defects that have the potential of producing series claims.”
But there are not only major corporations playing a leading role with offshore wind farms – mid-sized companies as manufacturers of parts should not be underestimated in insurance terms. “The increasing competition and the pressure for profitable offshore wind energy production are leading to necessary cost reductions. This means that manufacturers of wind power stations are turning to more favorably priced suppliers as a way of lowering production costs,” Robert Maurer says. “As insurers, we cannot check every detail related to the procurement of parts. But we can determine which processes are observed during manufacture. This will give us good insights into the professional work of the station makers.”
The code of practice
To be able to better estimate the challenges, problems and risks associated with the manufacture and operation of offshore wind farms and to completely cover them in insurance terms, Allianz is talking with other market players about a code of practice. In this process, insurers, manufacturers and stakeholders should compose a set of risk-related guidelines – similar to the Tunneling Code of Practice. “In the UK, the Tunneling Code of Practice grew out of a number of major losses in the area of tunnel construction,” Robert Maurer says. “At the time, the industry was forced to talk to insurers. The situation is not so dramatic in the area of wind power stations yet because we have not experienced any major insur - ance cases so far. But we intend to act now and promote an open dialogue with all involved parties.”
The lack of a dramatic situation in the offshore area does not mean that the rapid growth of the industry should be left up to chance. The fact that more and more major companies from Asia are entering the global wind power market is exerting pressure even on market leaders. The fear that the quality of products will suffer as a result is sweeping through the industry like an ill wind: “We intend to promote quality standards on an international level,” Maurer says. “Europe is still leading the way in wind power. But this can change quickly in the coming years.”