Media release
January 2014
Tackle renewable energy risks with specialist insurance know-how
By Warren Bolttler, CEO of PFP Insurance Brokers
In a concerted attempt to address the power shortage in the country and take advantage of the abundant natural resources, the South African government has recently approved a R33.3 billion investment into 17 renewable energy projects housed under the banner of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
Without doubt the renewable energy sphere is set to become an increasingly lucrative environment with more and more clients seeking to generate their own power by way of wind, solar or hydro power. Many mines are now also looking to generate their own power from renewable energy sources.
South Africa is especially well positioned to generate power from renewable energies because of an abundance of natural resources. Its solar resource are in fact one of the highest in the world, and although not as abundant a resource as solar, it has significant wind potential as well. South Africa is also an importer of hydropower. Being part of the Southern African Power pool allows the free trading of electricity amongst the Southern Africa Development Community (SADC), which means South Africa has access to hydropower potential in the SADC region. The major producer in that area is Congo River Basin, which accounts for 13% of the hydropower potential globally. There is also huge potential in Zambia, Zimbabwe and Zaire, as well as from the Cahora Bassa station in Mozambique once the transmission line is repaired.
This type of investment however brings its own cost and risk imperatives. Mining and Energy insurance is complex and difficult and risks can be difficult to place in the insurance market, often requiring specialised broking skills in order to achieve fair pricing and the correct level of coverage that is required.
London based Price Forbes & Partners has a long history of working with clients in the mining and energy sectors. In response to clients’ needs, it decided to bring together all its experience from across the company into one team, offering clients from the US, Canada, South Africa, Australia and other territories a coordinated service-orientated team.
Price Forbes and Partners and its wholly owned subsidiary in South Africa, PFP Insurance Brokers, has built up a specialist division that concentrates on power generation, including renewables and nuclear, as well as catering for the mining industry as a whole.
Experience has shown that when clients try to develop power from renewable sources, there are a lot of considerations one needs to take into account, such as who manufactures the equipment, the siting and foundations, and who ensures that full warranties are maintained.
One of the biggest challenges in this space relates to ensuring that the project as a whole is adequately protected by insurance. This is often quite complex as there are usually several parties involved in the construction of these large projects, with the specification, design and construction elements handled by separate specialist companies. Each party involved in the project seeks to limit their liability exposure as far as possible, usually to a percentage of the fees charged on the project. Small contractors also simply don’t have sufficient budgets to purchase adequate policy limits. For the project principle, this is particularly problematic, as the principle can end up being responsible for any claim which exceeds the policy limit.
The placement of multiple separate policies also creates several potential gaps in cover which could result in a claim not being paid. In addition, policy wording differs from insurer to insurer and subtle differences in the wording can create ambiguity. Furthermore, given the nature of these projects, a single loss incident can involve several contractors, each of whom are insured under a different policy.
Price Forbes believe a better way to manage this is to provide a single blanket policy or programme which is controlled by the Principle. This then ensures that the correct covers are bought, at the correct limits, and any ambiguity in wording or gaps in cover which arise because of the existence of several policies, are removed.
Sourcing capacity presents yet another challenge. Fortunately as renewable energy projects have started taking off in South Africa, the South African insurance market has kept pace with these developments – to such an extent that the South African market has enough capacity to underwrite all, or at least a large portion, of these renewable energy projects.
Encouragingly the South African market is more competitively priced than the traditional American and European markets allowing good deals to be generated underpinned by strong and disciplined underwriting.
Because of the unique risk associated with projects of this nature, placement of an insurance portfolio needs to be handled by a broker who will take a holistic view of the insurance programme, have the correct skills base and appreciate the finer nuances associated with the industry’s particular requirements. Many of these type of projects for example are situated in remote sites and standard solutions need to be modified to accommodate both the insurer and the client. A good broker will pick up on nuances and negotiate with the insurers for an alternative, more workable policy condition and minimize the overall risks associated with complex projects such as these.
