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Insurance & Reinsurance
As more countries in Asia pledge to work towards carbon neutrality, there is a growing demand for renewable energy sources, such as wind energy. Some Asian ambitions include:
A trend is for wind farms to be constructed further away from shore, to capitalise on higher wind speeds. Riding on this wave (and race) in Asia to build more windfarms is the expected growth of Asian turbine OEMs, especially in and from China. However, as some of these Asian OEMs are relatively new, it remains to be seen if these turbines will be fit for purpose over the duration of their design life. This article highlights some of the potential steps that insurers can undertake to minimise the potential risks posed by manufacturing defects.
Traditionally, European OEMs have dominated the wind turbine manufacturing market. For the first time, the Chinese company, Xinjiang Goldwind Science & Technology is the top global wind turbine manufacturer. In fact, according to Bloomberg, six of the top ten wind turbine manufacturers are from China. Other Asian suppliers include companies from Japan (Hitachi and Toshiba), Korea (Unison) and India (Suzlon and Inox).
A key benefit of Asian-based OEMs is likely to be their price point, especially for made-in-China turbines whereby its price is, reportedly, well below the global average. The ability to offer competitive pricing may be attributed to China’s ready supply chain that boasts of an abundance of steel and rare earths.
Another benefit from Asian-based OEMs is that they might be closer to the project sites, reducing transportation costs and time.
While owners / operators might be tempted to switch to Asian-based OEMs’ products to benefit from their lower prices, it bears highlighting that the reliability of these turbines / equipment might not be equivalent to other more longstanding / established brands (a substantial proportion of which are European-based). There is, therefore, a question mark over the design, build, reliability and actual (as opposed to ‘expected’) service-life of these products. This might raise general concerns regarding ‘defects’ and ‘faults’ from OEMs or suppliers which might be experienced in the project build or operation over time. To try and mitigate these risks, insurers might wish to consider: (1) reviewing the insured’s underlying contract(s) with the Asian-based OEMs / suppliers, to determine who those OEMs / suppliers are (and assess their ‘track record’); (2) consider the warranty provisions in the underlying contracts and any potential policy exclusions, limitations and/or subrogation rights which might be relevant to either: (a) considering an insurance claim from insureds where there is liability under a separate applicable warranty; (b) restricting or excluding policy cover for OEMs themselves (in project insurance) where the loss or damage is caused or attributed by issues that are addressed in their underlying warranty provisions to the insured; and/or (c) preserve subrogated rights against the OEMs / suppliers; and/or (3) incorporate broad defects exclusions in the policies (which we discuss below).
When reviewing the underlying contract, insurers might wish to consider if the manufacturer provided an adequate warranty for manufacturing defects and the duration of that cover. MT Højgaard A/S (“MTH”) v E.On Climate & Renewables UK Robin Rigg East Limited and another  UKSC 59 is an interesting case in this regard, where foundation-related replacement costs amounted to €26.2 million and, it was argued, were covered under MTH’s warranty to E.On. MTH designed and constructed the foundations for 60 wind turbines for an offshore wind farm. Contractually, the foundations were to be designed to “ensure a lifetime of 20 years in every respect without replacement”. MTH designed and built the foundations based on the international standard (“J101”), however, shortly after completion, the works started to fail. It transpired that J101 contained a serious error. While there was no negligence attributable to MTH, it was found that they were in breach of their contractual obligations as the foundations neither had a lifetime of 20 years nor was their design fit to ensure such. This was notwithstanding MTH’s compliance with J101.
Additionally, insurers can enquire if the OEMs have adequate insurance to respond to any manufacturing defects (similarly relevant to subrogated recoveries).
Another consideration for insurers is the appropriate defects exclusion wording in the policy. The most common clauses in Asia in offshore wind projects are currently ‘LEG 2’, and ‘Defective Parts’ cover for WELCAR / WINDCAR. The suitability of these exclusions (or others) should be considered, as perhaps should which insured parties have access to any relief / cover for defects or faults written-back into the policy. Multiple exclusions can be incorporated, for example a LEG2 clause and series loss provisions; and/or changing cover depending upon whether the fault occurs onsite or offsite, and in what stage of the build or operations.
Consideration should be given to any double insurance arising from the incorporation of extended maintenance period cover in the project insurance, following commencement of operations (which might also / instead be covered under the operational policy).
The renewable energy landscape in Asia continues to morph as it responds to supply side changes. Other factors of which insurers should be mindful include the political landscape in which the project is situated, as it might affect operations (e.g., to obtain the necessary permits for operation of the windfarms) and pricing (e.g., if price tariffs are introduced / revised). The list of factors that underscore the Asian renewable energy market is currently extensive and fluid, and if insurers wish to discuss further, please contact our renewable energy insurance team.