The operational power landscape is changing. An industry once dominated by coal-fired power plants is turning increasingly to other sources, including renewables and other cleaner forms of energy.
Concerns over the problems that can occur, including power outages or service interruptions, remain as important as ever, however.
Managing these risks is critical and requires expert insurance solutions that are tailor-made for the power sector.
A trend toward renewables
The shift to renewable energies is fueled by concern over the depletion of our natural resources and climate change. Renewable energies are growing in importance and attracting increasing levels of investment.
In 2006, coal accounted for close to half of all domestic electricity generation. This was expected to drop to near 30% in 2017. Two years ago, renewable energy accounted for 10% of U.S. energy consumption according to the U.S. Energy Information Administration. This segment is expected to grow proportionately as we move into the future.
We have seen these trends in our own clients, who traditionally were heavily focused on coal-fired power plants but who have now either discontinued some of their existing assets or replaced them with more environmentally friendly power units like gas or renewable energy. Others have added pollution controls to existing coal plants.
Wind and solar energy combined to comprise approximately a quarter of the renewable energy that’s consumed in the U.S. (Photo: Shutterstock)
Types of renewable energy used for operational power
Several types of renewable energy support commercial sustainability. One widely used form of renewable energy is biomass, which refers to the use of organic materials, such as wood and agricultural products and solid waste, that are converted into other forms of usable energy. Another widely known form of renewable energy is hydroelectric power, which accounts for approximately 25% of renewable energy and uses the water stored in dams and water flowing in rivers to produce electricity. However, much of the potential of hydro has already been used, and it’s not considered environmentally friendly when involving flooding of large areas to create a dam reservoir.
Wind and solar energy combined to comprise approximately a quarter of the renewable energy that’s consumed in the U.S. Geothermal electricity, in which heat energy is derived from the earth through magma conduits, hot springs or hydrothermal circulation to spin turbines or heat buildings, is a form of alternative energy that’s considered to be sustainable and reliable. However, this energy is diffuse, and can only be cheaply harnessed in certain locations. Tidal power, which is created from the action of ocean waves and tides, is another possible source of renewable energy, but it has not yet achieved significant success.
Solar and wind technologies
Solar and wind energy have seen rapid growth and are among the most successful, truly renewal power technologies for commercial use. Wind energy is produced by turbines that capture wind flow and convert it into electricity. The placement of wind turbines in the ocean is a newer way to capture wind and can produce roughly twice as much energy as inland wind turbines.
There are two primary types of solar energy technologies. The most common is the use of photovoltaic panels, which have improved significantly. Solar energy can also be created through concentrated solar power technologies, which use mirrors to reflect and concentrate sunlight onto a single point where it is collected and converted into heat used to produce steam to drive a steam turbine.
The challenge of storing solar and wind energy is being addressed by battery energy storage systems (BESS), one of the newer aspects of renewable energy. These systems allow energy to be stored when it’s being produced and not used, allowing it to be used later to satisfy demand.
Given the close relationship between renewable energy production and the weather, customized insurance solutions exist that can hedge against weather risk, smoothing out the financial effects arising from the lack of expected winds and sun. (Photo: Shutterstock)
Risks associated with renewable energy
While renewable energy may be the way of the future for operational power, risks can hinder productivity but can be protected with appropriate insurance. In the case of solar, collection panels are susceptible to damage from hail or significant winds. A recent example occurred when newly added solar panels in Puerto Rico’s second largest solar farm were ripped from their foundation by Hurricane Maria. Another concern is the risk of corrosion from molten salt that’s used to transport heat in solar power tower systems. The unpredictability of the sun, can reduce the amount of energy produced.
Energy from the wind comes with its own unique risks. While manufacturers have worked to create protection measures, wind turbines are still sensitive and susceptible to being hit by lightning. Other types of loss may occur from the overstress of certain components in the machine such as the nacelle, a cover housing that houses all of the generating components, including the generator, gearbox, drive train and brake assembly. Wind farms built offshore can experience problems from the complex construction methods required, including the use of floating barges with cranes and the installation of sub-sea cables. And once operational, wind farms are susceptible to the vagaries of the weather, including storms or actions of the sea.
One of the newer risks that can affect the production of renewable energy, as it can other methods of energy production, is the potential for hackers to penetrate the interconnected systems that govern operations. While we have not seen many such cyber-attacks in the U.S. resulting in physical loss or breakdown of power generating assets, it has occurred in other countries.
Weather protection for renewable energy
Given the close relationship between renewable energy production and the weather, customized insurance solutions exist that can hedge against weather risk, smoothing out the financial effects arising from the lack of expected winds and sun. These products can help to improve cash flow stability over time when renewable energy production fails to meet expectations due to the weather. Of course, this type of financial product is in addition to the variety of essential and traditional insurance policies that protect against property loss during shipment of equipment to the site (project cargo), construction and testing (builders risk), and insurance coverage once plants are in operation (operational property). These property insurance products might be expanded to cover the resulting financial loss from a covered property loss via a Delay in Start Up (DSU) policy section for Project Cargo or Builders Risk policies or a Business Interruption (BI) section for operational property policies.
The renewable energy sector has grown rapidly due to technological progress and policy incentives, and is expected to make up a significant amount of infrastructure investments in the future. As with any other investment in operational power, it’s important that those involved in the construction and operation of these projects understand the unique risks they face and ensure they’re adequately protected.
Honorio Campos is Team Leader, Engineering for Allianz Global Corporate & Specialty (AGCS).