Insurance Helps Fuel Energy Alternatives

Insurers introduce policies that protect fast-growing renewable energy producers and their investments

With the steadily increasing costs of fossil fuels — both the monetary cost and the environmental impact — there has been more focus on the production of alternative fuels. Regardless of what may ultimately be responsible for the perceived phenomenon of global warming and its purported effects — including receding polar icecaps — environmentalists, geologists and others believe there is an absolute need to find alternatives to oil as an energy source. Perhaps renewable energy is the answer.

Renewable energy technologies range from solar power, wind power and hydroelectric for electricity generation, to biomass and biofuels for transportation. Currently, only 13 percent of the world’s primary energy comes from “renewables” with most of the renewable energy coming from traditional biomass. Hydropower is the next largest renewable source, providing 2 to 3 percent of capacity, while modern technologies like geothermal, wind, solar, and marine energy together produce less than 1 percent of total world energy demand.

Government Mandates

The U.S. government recently enacted legislation to stimulate the production of alternative fuel sources. Known officially as the Energy Independence and Security Act of 2007, it introduces several new standards including a provision requiring automakers to meet a combined fleet-wide average increase of 35 miles per gallon by 2020. This is the first increase in automobile mileage requirements since 1975 when automakers faced the same ultimatum then as they do today — to design more energy-efficient vehicles.

The Act also calls for ethanol production from both corn and other sources such as woodchips and switchgrass — for use primarily as a gasoline additive — with a plan to increase their output nearly fivefold over the next 15 years. During the past two years, this area of biofuels has undergone significant growth and has become one of the most active in clean-tech investments. The mandate for U.S.-grown biofuels is 36 billion gallons per year by 2022, with 21 billion coming from non-corn-based, or “advanced,” biofuels. This advanced fuel is called cellulosic ethanol, and although it is chemically identical to ethanol produced from corn or soybeans, it exhibits a net energy content three times higher than corn ethanol and emits a low net level of greenhouse gases. Because of advances in biotechnology, researchers can now transform straw and other plant wastes into the “green” gold of cellulosic ethanol. The Act requires advanced biofuels to contribute 0.6 billion gallons in 2009 and steadily accelerates their contribution into the future, reaching 21 billion gallons by 2022.

The Energy Independence and Security Act of 2007 didn’t provide expected tax incentives and utility mandates for renewable power generation but that hasn’t slowed down wind energy installers’ and operators’ production around the world. The Global Wind Energy Council announced in mid-January that the global installed wind energy capacity exceeded 94 gigawatts (GW) in 2007. Worldwide, companies installed 20 GW of new wind power last year generating a 27 percent increase in global wind energy capacity. The United States is currently the best market for wind power and last year alone U.S. companies installed over 5.2 GW of new wind energy capacity. Wind power’s strong performance is expected to continue this year, with initial estimates indicating that 2008 could equal 2007 in new wind capacity installed.

Risks for Renewal Energy

Like other technical risks, renewable energy projects are susceptible to conventional physical hazards such as equipment breakdown, business interruptions, or losses from natural catastrophes. In some cases where there are relatively high risks, such as offshore wind, insurance availability might be limited. In other cases the prototypical nature of the technologies may translate to higher perceived risk by underwriters, which could make renewable energy insurance more costly.

The new technologies, whether in wind generation or biofuels, demand larger component sizes creating unique situations that require insurance coverage capable of protecting operations from all aspects of loss.

For example, a manufacturer in Germany recently developed the largest turbine in the world that will produce enough energy to power over 1,770 American homes. Officially rated at six megawatts, this one wind turbine will most likely produce over seven megawatts — or 20 million kilowatt hours, per year — much more than any of its predecessors.

With so much now riding on the success of renewable energy, how can energy producers protect their investments while meeting the growing demand? Insurance companies have introduced new policies that can better address the changing coverage needs of renewable energy operations. To help fully protect their facilities, operators will want a policy that encompasses multiple insurance coverages supported by strong loss control and underwriting infrastructure. Such a policy would include a suite of products that provides insurance for contractor’s all-risk, project cargo, start-up delays, operational material damage, business interruption and third-party liability. This balance of technical and commercial considerations can provide significant underwriting capacity, stable security, and a cross-line approach to covering all of a facility’s risks.

As with traditional energy risks, seeking the guidance of loss control experts can help prevent or reduce the likelihood of, or mitigate, loss at renewable energy operations. These risk specialists, who have the expertise to evaluate a specific type of operation, will conduct on-site inspections and provide hands-on solutions to clients. These specialists or loss prevention consultants will develop recommendations on how to protect a facility from all types of exposures.

An example of a risk unique to renewable energy is the fire hazard faced by ethanol manufacturing facilities, which are often built in rural areas where fire department access is usually limited and typically run by volunteer firefighters. In remote-location operations such as these, it becomes imperative that facility protections include such things as automatic sprinklers, deluge and foam as well as a trained fire brigade especially in the absence of a fully-manned fire department. Consultants working with remote facilities often recommend a high level of standardized protection to ease the insurance process and to allow operators to focus on their business, rather than what will happen if a fire breaks out.

Brokers and insurance carriers can recommend reliable risk specialists such as the National Fire Prevention Association (NFPA), which has developed codes and guidelines addressing exposures that may be prevalent at renewable energy facilities.

The demand for renewable energy alternatives will continue to grow in 2008 as economic projections promise climbing prices for petroleum products, gasoline and diesel with no downturn in the foreseeable future. Securing the right level of insurance coverage for your client’s renewable energy facilities will help companies continue to meet that demand.