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Read MoreOver the course of the last two decades renewable energy has been a subject that has found its way into discussion from the family dinner table to the top of global political initiatives and policies. It can at times be a polarizing topic; however, its relevance in the current geopolitical and geo-economic landscape is undeniable. According to World Resources Institute (WRI) Explaining the Exponential Growth of Renewable Energy:
“Wind energy first took off in the early 2000s, while solar energy took off about a decade later but has been growing even faster than wind. The factors driving the growth in renewable energy have been systemic, but certain key moments have reflected the larger trends or acted as turning points in renewable energy adoption.”
Within the same article WRI outlines the following:
“The market share of solar and wind in global electricity generation grew at a compound average annual growth rate of 15% from 2015-2020. If exponential growth continued at this rate, solar and wind would reach 45% of electricity generation by 2030 and 100% by 2033.”
Separately, according to the Deloitte 2022 Renewable Energy Industry Outlook:
“In 2021, the renewable energy industry remained remarkably resilient. Rapid technology improvements and decreasing costs of renewable energy resources, along with the increased competitiveness of battery storage, have made renewables one of the most competitive energy sources in many areas. Despite suffering from supply chain constraints, increased shipping costs, and rising prices for key commodities, capacity installations remained at an all-time high. Wind and solar capacity additions of 13.8 GW in the first eight months of 2021 were up 28% over the same period in 2020. Many cities, states, and utilities set ambitious clean energy goals, increasing renewable portfolio standards and enacting energy storage procurement mandates.
Renewable energy growth is poised to accelerate in 2022, as concern for climate change and support for environmental, social, and governance (ESG) considerations grow and demand for cleaner energy sources from most market segments accelerates.”
With the above context in mind, investment in—and construction of—new projects in the renewable energy sector will continue to grow and thereby increase the number of builder’s risk policies being underwritten. The aim of this paper is to review some of the unique circumstances surrounding renewable energy construction projects and how those circumstances can impact builder’s risk claims.
Damage to Components
Avoiding damage to components during the construction process is a top priority for every contractor and owner. However, even when the best care is taken, unavoidable circumstances arise, accidents occur, and components can be damaged. For example, on wind turbine projects some of the typical components that can be damaged are nacelles, hubs, rotors, and, most commonly, blades (as shown in Figure 2).
Some common causes of damage include weather events, transportation, delivery, and erection activities. When faced with turbine component damage, it is important that the parties involved weigh all the available options for repair or replacement and associated ramifications. Are the damages to affected components repairable, and is repair or replacement the most mitigative approach?
Key factors to review when considering whether to repair or replace damaged components include:
Weather Related Impacts
Extreme weather is a common peril faced at wind and solar energy construction projects . Some of the more common types of extreme weather events experienced are heavy rain, high wind, hurricanes, and hail. Each of these perils carries their own unique set of circumstances.
Flooding from heavy rains can result in impacts to construction progress, particularly when heavy equipment and large components are involved, as in the case of a wind turbine project.
When faced with this type of event, it is important that all involved clearly understand the options available. For example:
Each of these circumstances should be addressed and weighed against the specific site conditions and project circumstances.
High winds and hail can significantly impact wind and solar energy projects. As with all projects, it is critical that there is good initial documentation of the visible damages to the impacted components. This documentation should include:
The accuracy of the visible damage inspection data is important as it typically plays a significant role in developing testing strategies to address any potential unknown damages.
Fire
Wildfires and brush fires are another notable peril faced by solar energy projects. It is important to get to the impacted site quickly to ensure the most accurate site documentation. Some important initial questions to answer and document are:
The accuracy of this initial data is important as it typically plays a significant role in developing testing strategies to address any potential unknown damages.
The following are some unique types of testing for solar projects:
As is important with all testing methods, it is vital that a good baseline is established to ensure that data collected within the potentially impacted areas can be evaluated against real time field PV modules. This is vital as many factors can contribute to variations in performance and hidden defects aside from any loss being evaluated, including shipping, installation, and/or thermal expansion and contraction.
Initial Damage Assessments
As with any loss it is critical in renewable energy builder’s risk losses to accurately identify and document the scope of damages related to the claim event. This is typically achieved through:
As part of this scope identification, it is also important to document and discuss any potential exposures that are not immediately obvious. At solar energy sites these can come in the form of:
At wind sites these exposures can come in the form of:
In addition to documenting the scope of the impacted portions of the project, it is important to document the overall general status of the project, including areas not directly impacted by the event. The importance of this exercise is to ensure a good understanding of the status of construction progression at or near the time of the event. This information is valuable when analyzing potential impacts to the construction schedule and delays.
It is also prudent to have discussions surrounding the need for site monitoring or additional testing. Documentation gathered from site monitoring can be valuable if claim related repairs are progressing on a time and expense basis and if there are concerns that there are relevant chances of additional delays to the construction schedule. Additional testing can commonly come in the form of EL and power testing for solar sites and material and soil sampling in the case of wind sites.
Request for Information (RFI)
Due to the complexity of many renewable energy claims—especially if delay, lost productivity, or acceleration are being claimed—the RFI is critical to be able to properly review the claim. The RFI will include information related to evaluation of the claimed repair costs as well as documents which allow insight into the project status such as construction schedules, meeting minutes, daily reports, etc. The items below, although not all inclusive, represent typical critical information to allow a claim to be reviewed:
Solar and wind energy projects are often constructed in remote locations, and, in the case of wind farms, with equipment of significant size as compared to a more traditional commercial building construction. As a result, when delay is claimed on a solar or wind energy project there are some unique considerations when analyzing delay and acceleration/mitigation claims.
Component Availability
Availability of replacement components can be impacted by several factors:
The availability of replacement components can have collateral impacts on project schedule, crew and equipment sequencing, and site commissioning. It is important for contractors to consider all the collaterally impacted factors and potential mitigating options when deciding on a plan for replacement or repair.
Availability of Personnel and Equipment
Large scale wind and solar energy projects are typically located in remote and/or difficult to access areas. As a result, the industry primarily utilizes non-local resources for construction personnel. In addition, much of the equipment, especially erection cranes for wind farms, are of limited availability and are shipped from other locations, often booked well in advance.
When a delay occurs on a project, the following impacts and costs could be experienced but are not limited to the following:
Wind turbine projects are often constructed on leased land which typically requires construction of specific access roads, turning radii, delivery laydown areas, and crane pads for component delivery and erection activities. Depending on the specific project schedule and location of impacted turbines, site-specific access, delivery, and/or laydown areas may need to be reconstructed in part or in full which equates to additional repair time over and above the specific damage repairs.
Change in Season of Work
Delays to the project as a result of a loss can also push repairs and follow-on work into a different season. Examples of related seasonal impacts include:
Other Considerations
In addition to the items discussed above, the following may also be issues that should be considered when evaluating the delay on the project:
Policy Considerations
Typically, builder’s risk coverage provides an optional coverage for loss of business Income, often referred to as Delay-in-Start-Up (DSU) or Advance Loss of Profits (ALOP). Most often this coverage will be subject to a waiting period between 10 and 45 days. However, one of the notable differences between DSU/ALOP and traditional business interruption coverage in property insurance policies is that loss events for DSU/ALOP are often aggregated, and only a single waiting period will apply, whereas for most property policies each loss event is subject to a separate waiting period.
The valuation of the DSU/ALOP with respect to business income losses can vary significantly from policy to policy, often dependent on the insurer. It is essential for claims professionals to work closely with underwriters at the outset of the claim to understand the intent of the policy and coverage are in this regard.
Projecting Normal Operations
One of the most challenging aspects of evaluating DSU/ALOP claims is determining what revenues and expenses would have been earned/incurred but for the loss absent a historical record of performance. These challenges are no different when it comes to renewable energy claims, but there are options available to assist. Most renewable energy projects are required (as part of financing) to engage an independent engineer (IE) to prepare a report detailing the expected monthly performance of site which considers the following elements:
Ideally, the IE report will be taken into consideration with more traditional documentation sources to substantiate the accuracy. Examples of this documentation include but are not limited to pro-formas/ budgets, operational portions of the site, and post-loss generation performance.
Notable Considerations
Two business income aspects that are unique to renewable energy claims, including builder’s risk claims, are tax credits and nuanced power purchase agreements.
Federal Renewable Energy Tax Credits
In the United States in particular, federal tax credits have been a driving force behind renewable energy development. Large-scale wind farms can earn 10 years’ worth of production tax credits (PTC) following achievement of Commercial Operations Date (COD). The PTC are extremely valuable and, in some cases, can even exceed the value of the sold generation.
Solar projects are eligible for investment tax credits (ITC) which are based on a prescribed percentage of qualified investment costs. Understanding PTC and ITC qualification is of particular importance when addressing builder’s risk claims because the delay itself can threaten the mileposts necessary to fully qualify.
Power Purchase Agreements
Traditional (non-renewable) power generation facilities have historically been developed and operated under power purchase agreements (PPA) which are contracts between a seller and buyer of electricity. These agreements provide the terms of the sale of the electricity (e.g., pricing, volumes, penalties, etc.). Having a PPA in place can be essential to securing financing to build-out utility-scale gas or coal fired power plants, as an example.
Renewable energy projects are typically operated on a much smaller scale compared to traditional power generation facilities, and, as a result, securing a PPA with a utility off-taker is much more unlikely. However, the necessity for a guaranteed off-taker for renewable generation remains. As a result, there have been some creative workarounds put in place. First is a corporate PPA, which is a contract between the renewable asset and a strong corporate partner who is likely looking to reduce their carbon emissions as part of regulatory obligations or eco-initiatives. The second is a virtual or synthetic PPA, in which no power is actually traded; rather, these agreements essentially serve as a financial hedge agreement often calling for requirements to purchase/sell another form of energy to/from a financial partner.
Understanding how these PPA alternatives work is essential for both insurers and claims professionals to understand when evaluating loss of income claims, including DSU/ALOP.
Considering the current market projections for growth within the renewable energy sector, investment in and construction of renewable energy projects is likely to continue to increase; as will the associated builder’s risk policies. This paper has reviewed some unique circumstances associated with renewable energy construction projects and how they can impact builder’s risk claims, including:
While not every situation can be covered in one paper it is the hope of the authors that this discussion provides some general insight into the unique characteristics of handling potential losses associated with builder’s risk claims on renewable energy construction projects.
We would like to thank Timothy Dowden, Jan Inguagiato, PE, and Daniel L. Williams, CPA, CFF for providing insight and expertise that greatly assisted this research.
Timothy Dowden is a Senior Vice President and the team lead for J.S. Held’s dedicated Renewable Energy group within the Building Consulting Practice. As the team lead, Timothy oversees renewable energy consulting projects and operations throughout the U.S. Timothy has more than 10 years of experience in the construction consulting industry. He has been responsible for a multitude of consulting tasks such as project management, assessing, estimating, monitoring, and auditing of collapse, fire, wind, hail, water and flood damage claims of various sizes and nature. His assignments have taken him throughout the United States. He has consulted on project claims ranging from the renewable energy sector to commercial construction, hospitality sector, multi-family residences, and high net worth custom residences.
Over his career Timothy has had the opportunity to be a speaker and a panelist presenting on topics such as property loss and builder’s risk claims in the renewable energy sector.
Tim can be reached at [email protected] or +1 951 228 3203.
Jan Inguagiato is a Senior Managing Director in J.S. Held’s Builder's Risk Practice. Jan is a construction expert specializing in project scheduling, delay, cost, project management and expert witness testimony. Jan’s experience includes both wind and solar renewable energy projects as well as, transportation, industrial, hotel/condominium, residential and commercial projects. Jan has over 26 years of experience in the construction field, as a consultant for large, complex insurance losses, with a concentration on construction scheduling and cost evaluation, as a project manager for a large global design and construction company as well as serving on Active Duty in the United States Army Corps of Engineers.
Jan can be reached at [email protected] or +1 202 215 1942.
Daniel L. Williams is a Senior VP in J.S. Held’s Forensic Accounting – Insurance Services Practice. Mr. Williams has over nineteen years of forensic accounting experience and is primarily engaged as a consultant by insurance companies, independent insurance adjusters and attorneys. He specializes in the financial evaluation of damage claims, including first party property losses, commercial litigation, and fidelity matters. Notable focused industry expertise with commercial airlines and renewable energy, including wind and solar farms as well as hydro-electric and bio-mass facilities. Mr. Williams has been responsible for evaluating damage claims totaling over $3 billion.
Dan can be reached at [email protected] or +1 510 740 0378.
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