Author: Thorfinn Stout
However, as the demand for renewable energy continues to rise with the pressures on climate change and a greener economy, recent events have also led to a shift in policy across the sector in support of our net-zero goals.
The pressures to meet the demand for renewable energy has only been expedited with Russia’s invasion of Ukraine, leading to instability in energy prices and highlighting the global concern of energy security. This is coupled with the economic shock following COVID and the significant reliance experienced on overseas supply chains. Below we have highlighted some recent policy and regulatory updates within the energy marketplace.
There has been exceptional growth in renewable energy projects across the UK over the last number of years, with solar energy projects now receiving more support from government policy. The latest Contracts for Difference (CfD) scheme (Round 5) awarded more than half of the 3.7GW of capacity available to solar projects. The government has also recently announced an increase in the administrative strike price to £61/MWh for UK solar projects successful in CfD round 6 (forecast Q2 2024), offering a greater sense of certainty for developers1. However there are other mechanisms being agreed in which to deploy renewable energy projects. Long term power purchase agreements (PPA) are also being favoured to avoid the volatility of wholesale energy pricing.
The energy sector is under pressure due to the long lead in times being experienced across the sector; with grid capacity and foreign supply chain reliance and shortages causing a backlog of projects unable to get off the ground. Ofgem have recently announced new rules to free up grid capacity with “Zombie” projects being terminated and replaced with projects ready to connect to the high-voltage transmission2. This should encourage the acceleration of current delayed projects to deploy faster, as these rules are enforced over the forthcoming years. The autumn statement has highlighted government funding for the UK manufacturing sector, with a £960 million funding package being earmarked for the clean energy sector3. This is a positive step as the UK look to increase their own expertise and capabilities, reduce the exposure on the reliance of overseas supply chains, and attract investment in the sector.
Climate chain mitigation is fundamental to supporting our net-zero ambitions, and this can only be addressed with the support of green energy projects being deployed. Addressing the various risk transfer and mitigation strategies as a project owner is pivotal to the lifecycle of a solar project, ensuring long term financing and insurability. From initial concept and design, through to commissioning there are a number of exposures to address; including construction, environmental, regulatory, technological and operational risks. Working closely with an insurance partner through this lifecycle can contribute to the organisations risk programme and profitability. These phases are discussed further below.
Project Concept Design Phase
At this early stage, a wide range of exposures need to be considered in order to ensure the project is insurable and fundamentally viable. Considering insurance risks should form a key part of discussions, including; lease agreements, site layout, security requirements and contractual/legal obligations between parties (including lease agreements, EPC contracts and loan agreements). Early engagement with insurers is pivotal to ensure we meet the loss controls required as well as spacing requirements between key equipment. Reviews will also be required for geo-mapping, flood analysis, and water source availability. Due diligence should be carried out for key supply chain partners and suppliers. Failure to review these points can cause significant delays, increased costs or ultimately an uninsurable project.
As all necessary preparations are complete for the construction phase, it is paramount to review the insurance placement strategy at this stage. Project owners must decide whether to insure the project themselves or rely on a main contractor, and this should be discussed in depth with your advisor. This may be led as per lenders requirements and the primary security in place, which highlights again the importance of conducting contractual reviews during the project concept phase.
Ensuring the construction contracts align with insurer requirements is very important, and contract reviews should be facilitated with your insurance advisor. This will include; construction contracts, contractor insurance covers/limits, balance of plant, and project time frames. Lightning protection measures will need to be addressed, and reviewed against insurer loss controls. Geotechnical assessments, component installation, plant control and storage on/off site, as well as safety and security both from a legal and insurance perspective should all be considered prior to installation.
Upon completion of the installation, testing and commissioning the insurance responsibility usually passes to the owner, and the project transitions from a construction policy to an operational policy. The risk will generally be transferred from the EPC contractor to the project owner, and this transition from testing and commissioning to energisation can be the greatest period of risk for a solar project with electrical and mechanical plant. High voltage and low voltage testing, inspections, thermography testing, site controls and remote monitoring systems will all be assessed and signed off at this stage.
Ensuring the right operational and maintenance contracts are in place for key equipment is vital, to ensure the safe operation of the site and that these meet the requirements set out under an insurance policy. Business continuity systems and preventative maintenance will also be reviewed as per the plans laid out during the design/concept phase.
With the UK government driving a solar deployment target of 70GW by 2035, we are experiencing significant growth in the sector with a host of projects in planning, permitted and under construction and operation4. This consequently has a direct impact on the insurance market, where demand is high and insurers are requiring comprehensive risk profiles to meet their loss controls and appetite. There is a small pool of insurers willing to write in this sector, and not only does a well-structured risk profile increase appetite for the project, this will also assist in reducing premium spend. Early engagement with a specialist renewable energy professional is vital to ensure that projects are successful, with structured risk programmes implemented to mitigate and transfer risks, which will ultimately support the projects bankability.