The Insurance-Debt Nexus: How risk policy keeps renewable energy bankable

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Innovate UK
Innovate UK
Innovate UK
Innovate UK
Innovate UK

£1,656,440

Feb. 1, 2023

Jan. 31, 2024

**Pool Re for Energy**

This project pioneers a new financial architecture around 'insurability' and 'bankability' for critical national infrastructure. Established in 1993 as a reinsurer of last resort for losses due to terrorism, Pool Re was followed by Flood Re in 2016 regarding climate risks. Successful climate mitigation can be accelerated by an 'Energy Re' where collective self-insurance is initially supported by the State. The best risk managers are the asset owners. So rather than try to educate the insurance companies, better to be the insurance company themselves. As well as enhancing energy security, this also saves money for the consumer.

**Context**

Known as OFTOs, the offshore transmission owners are special purpose vehicles (SPVs) for high voltage transmission infrastructure which includes export cables to shore that are by statute 'unbundled' by the developer of a windfarm before it becomes operational. These are often highly geared assets, where project finance is crucial to the 6 OFTO owning companies that are responsible for the 23 live assets that surround the UK.

Approximately 80% of the value of offshore wind claims have come from cabling losses. Of these costs, about 65% are attributed to vessel hire, which can amount to between £100,000 and £200,000 per day. Nearly 40,000km of offshore wind farm export cables are forecast to be laid worldwide by 2030, compared with just over 7,500km at the end of 2020\.

**Challenge**

An escalating cost of damages in the offshore wind subsea cable sector has led to a hardening insurance market, increasing premiums, and creating more stringent terms. This sellers' market leads in turn to a reduction in 'bankability' which reduces 'investability' since the equity internal rate of return (IRR) is less leveraged by debt.

**Solution**

Collective self-insurance will enable electrical fault-finding technologies to enhance preventative maintenance of export cables in offshore wind. The current reliance on the need to prove 'physical damage' for the insurance policy to respond means that repair campaigns are often delivered at great expense (i.e. during winter). The ability to intervene at the discretion of a mutual will reduce the cost burden of vessel hire.

Collective procurement will allow asset managers to stock cost saving equipment such as universal joints that are currently beyond their means. Information sharing between ordinarily competing organisations will enable the development of best practice. Only through collective self-insurance can these solutions be delivered. And to do so is in the public interest.