OPINION: Let’s be clear: the lack of standardization is muddying the offshore windfarm waters
By GEORG NYGAARD - CEO
The lack of standardization and uniformity in the offshore wind industry are key challenges, leading to the nagging problem of escalating costs.
Unfortunately, this lack of standardization is not only found amongst the turbine suppliers in their constant race for scale, or amongst the suppliers who still want to commercialize their own designs. Nor is it unique to an industry that seems unwilling to narrow the technology pyramid even though it may need to do so; lack of standardization is also found within the tricky business of insuring these growing mega-projects.
It is certain that, for the offshore wind insurance industry as well, the lack of standardization and uniformity drives costs up, too.
The underlying technical, operational and environmental risks formed by either construction, installation or operation of windfarms offshore are more than enough for the insurance market to wrap their head around already. It is unfortunate that the market has added additional uncertainty and risk by allowing ambiguity and unclear wordings, seemingly customized and modified for each client, broker or even individual project.
‘Predictability is a key word’
The fact that standardized insurance wordings have not been developed and maintained for the industry is unfortunate and a material driver of costs related to procurement of insurances for offshore wind projects. Predictability is a key word for insurance; when clauses are amended and tweaked repeatedly, they end up in numerous versions. It may then be challenging to see the differences, and a clear and industry-uniform understanding of coverage on that particular point is often not easy to find.
‘Geopolitical uncertainty’
For example, we clearly now live in a world of increasing geopolitical uncertainty, particularly along key maritime trade routes and shipping lanes. For an offshore wind construction project with parts and components being manufactured and shipped to a project site from all over the world, one would think that it would be essential to quickly and clearly confirm whether war coverage for various project-related cargo transits is included or not. However, when we at NIORD challenge brokers and lawyers in the market with some of the wordings currently in use, the only thing which is clear is that it is not clear!
Alternatively, let us look at serial loss limitations. In an industry based on serial production, one should expect clear compensation rules for losses of a serial nature. Should one deductible be applied per damage or per root cause, and how do waiting-period deductibles function for serial losses resulting in Delay in Start-Up, or Business Interruption claims? For windfarms with hundreds of turbines, are insurance limitations for serial loss damage reset every year, or are they to be applied per root cause across policy years? How should lump sum costs be allocated: attributed all to the first loss or apportioned across all the losses? And should losses be claimed in chronological order of discovery or occurrence, or can the costliest losses be claimed first? These are simple questions but their answers may, however, be much more challenging.
‘Initiatives’
Luckily, several initiatives are ongoing which attempt to try to clarify and standardize the insurance wordings and coverages in the industry. NIORD supports them all and takes an active part, particularly in the current Nordic project of developing an agreed set of insurance conditions for both the construction and operation of floating offshore windfarms.
‘Benefit’
Insurance is a keystone of the developing offshore renewables industry, vitally important for any project to be bankable and have its finances in place from both a lender’s and investor’s point of views. Cost-creep will continue to be a headache and likely be one of the biggest problems to overcome for the industry to meet its goals for growth and commercialization.
From the insurance side, let us contribute by standardizing cover and removing as much ambiguity and unclarity in the coverage wordings as may be possible. In this manner, we will enable the reliable establishment of a more predictable and cost-effective insurance product for the benefit of the entire offshore renewables industry.
