Learning from losses: offshore wind at a turning point

Above: Causes of offshore wind insurance claims. Based on 126 claims across Allianz Commercial’s offshore wind portfolio in Germany and Central and Eastern Europe from 2014 to 2020 (Source: Allianz Commercial)

The potential of offshore wind as a viable source of clean power for the energy transition is indisputable, says Allianz Commercial, noting that investment in the sector is growing rapidly around the world, the installed capacity of installations is ramping up, and technological innovations are proliferating – from multi-purpose windfarms and floating installations to next-generation connectivity and drone-based maintenance. However, developers and their insurers need to manage a range of risks to successfully scale offshore wind globally, among them prototypical technology, economic pressures, more extreme weather conditions, cable damage, and collision perils, as well as environmental concerns.

Learning the lessons from past losses – which are primarily damage to cables and turbines – is “essential for the industry to continue to grow sustainably,” says Anthony Vassallo, Global Head of Natural Resources, Allianz Commercial. “Emerging risks need to be explored, too, as developers prepare for widescale deployment of offshore wind around the globe. The size of turbines is ever increasing, wind farms are moving further out into harsher marine environments where they are more exposed to extreme weather, and technological innovation is constantly progressing. Navigating biodiversity issues in coastal communities will also become more important as demand for ocean space is set to increase fivefold by 2050.”

China overtakes Europe as biggest market

More than 99% of total global offshore wind generating capacity is in Europe and Asia-Pacific today, but the US is investing heavily in this sector and China has overtaken Europe as the world’s biggest market, with half of the world’s offshore wind installations in 2023 expected to be in China. In 2022, 8.8 GW of new offshore wind capacity was added to the grid worldwide with global installed capacity reaching 64.3 GW. Around 380 GW of offshore capacity is expected to be added across 32 markets over the next ten years, according to the Global Wind Energy Council.

While growth ambitions are huge, all is not plain sailing for developers, according to the Allianz report. Spiralling costs have halted major wind projects recently and the industry is impacted by inflation, capital expenses, rising interest rates, and geopolitical instability. The cost of materials and vessel hire have risen, while the supply of materials and access to contractors remains challenging. Supply chain bottlenecks, lengthy permitting procedures and delays to grid connections are also exerting pressure.

“The scale and scope of the global offshore wind roll-out is epic. It requires the expansion of manufacturing footprint, port facilities, and infrastructure. And it needs to be fast-tracked by all stakeholders in a joint effort – financial institutions, corporates, and governments,” says Adam Reed, Global Leader Offshore Renewables and Upstream Energy, Allianz Commercial.

Cables top cause of claims

Both the energy sector and the insurance industry have considerable expertise when it comes to managing the perils of offshore wind activities. In one of its largest offshore wind insurance markets, Germany and Central Eastern Europe, Allianz Commercial has seen 53% of offshore wind claims by value from 2014 to 2020 relate to cable damage, followed by turbine failure as the second major cause (20%) (see graph, above). From the loss of entire cables during transport to the bending of cables during installation, cable losses have incurred multi-million-dollar losses in offshore wind as cable failure can potentially put a whole network of turbines out of commission.

“Cable risk is critical and therefore the quality of service is vital,” notes Reed. “Contractors need to provide assurance they have the required expertise to remedy incidents and that they can source replacement components quickly in order to contain losses incurred during downtime. From an underwriting perspective, with subsea cabling work insurers pay close attention to the type of cabling used, the kind of vessels involved, the communication between client and contractor, and how often qualified risk engineers will make site visits to oversee proceedings.”

Innovations that break the mould

The sector has to carefully manage the deployment of emerging technologies at scale, says the Allianz report. Novel approaches include so-called ‘energy islands’ which share power between grids and nations and multi-purpose wind farms that produce green hydrogen and/ or host battery storage facilities. Pilot projects such as the Offshore Logistics Drones of German utility company EnBW explore the deployment of drones for the maintenance and repairs of turbines, reducing the reliance on helicopters and humans. While most offshore wind power is currently ‘fixed-bottom’, the development of leading-edge floating wind technologies in deeper ocean waters is poised for commercialisation.

Managing the increasing size of wind turbines is another key challenge. In the last 20 years they have nearly quadrupled in height – from around 70m to 260 m. Rotor diameters have increased fivefold in the past 30 years. Offshore wind turbines with capacities of 8 or 9 MW are common, but newer models reach 14 to 18 MW, with a wind farm project in Australia recently announcing plans to use 20 MW turbines.

“With new technological approaches and an increase in turbine size comes a corresponding increase in risk. We are closely monitoring the many innovations in the offshore wind industry, which include prototypical technologies, pilot projects, and evolving standardisation. These new and unproven technologies often come with a lack of technical maturity and available data. By partnering with clients in the early stages of projects, and exchanging knowledge and learnings, all parties will gain a greater understanding of the exposures involved,” says Dr Wei Zhang, Senior Risk Consultant, Natural Resources, Allianz Commercial.

Vessels and collisions

Another pressing problem identified in the report is the availability of specialist vessels. A bigger fleet globally is needed that goes beyond Europe as its primary location, and includes installation, jack-up and support vessels.

Meanwhile, vessel collision with turbines and offshore infrastructure can also result in significant losses, with an uptick in incidents seen in recent years, the Allianz report also notes. Although, to date, these have typically involved smaller vessels, often resulting from human error, there have also been a number of incidents involving larger vessels, an increasing concern given some 2500 wind turbines are due to be installed in the North Sea alone before 2030.

Navigating harsher environments

Although the offshore sector in Europe has significant expertise in managing operations in hazardous marine environments, as it expands around the world, there will be new developments further from shore in territories prone to different types of weather conditions and natural catastrophes. “On the East Coast of the United States or Taiwan, for example, wind speeds and wave action will be much more significant. It remains to be seen whether climate change will heighten the risk, as rising sea surface temperatures can intensify the strength of hurricanes,” says Reed.

Despite its invaluable contribution to the net-zero transition, the offshore wind industry needs to be mindful of responsible development and environmental stewardship, the Allianz report points out. This includes managing its impact on biodiversity and marine wildlife or the sourcing of required raw materials such as rare earth elements or lithium.

Allianz speaks from experience, having been involved in a number of significant offshore developments, as investor or insurer. In its recently launched Net-Zero Transition Plan, Allianz Commercial committed to a revenue growth of 150% for renewable energy and low-carbon technology by 2030. In addition, Allianz committed to €20 billion in additional investments for climate and clean-tech solutions. As an investor, the company is contributing to about 100 wind farm and green energy projects such as Hollandse Kust Zuid (Netherlands), He Dreiht (Germany), NeuConnect HVDC link (UK/ Germany). Allianz Commercial provides insurance coverage solutions across all stages of offshore wind development, construction and operations and is the insurer of many projects, among them Revolution Wind (USA), Dogger Bank (UK), NeuConnect and Jeonnam 1 (South Korea).

Turbulent times

Turbulent times in the offshore wind sector could change the way large-scale energy projects are built and funded in the future, according to the latest EY Renewable Energy Country Attractiveness Index (RECAI). Offshore wind is crucial to achieving net zero but has experienced a difficult 12 months, challenged by a squeezed supply chain and escalating costs, says EY. “Global project costs have risen by 39% since 2019 and the next decade could see cost inflation adding around US$280 billion in capital expenditure for the sector.”

Against this backdrop, around 80% of the 15 markets with offshore wind targets for 2030 are predicted to miss their stated goals. Not least, the UK has conceded its lead position as the most attractive country to host offshore wind projects, falling three places to 7th position on the Index overall. The failure of the UK’s 2023 CfD auction to entice offshore developers to bid represented a huge setback for the UK’s goal of reaching 50 GW of offshore capacity by 2030 [although, with strike prices revised upwards it is hoped next year’s auction will prove more successful].

“For offshore wind to fulfill its role in global decarbonisation, it is necessary to mitigate risks that are beyond the control of developers, guaranteeing them a reasonable return on their investments,” says Arnaud de Giovanni, EY Global Renewables Leader. “Tensions in the offshore supply chain could be alleviated by standardising technologies, offering greater certainty to manufacturers and developers. And governments need to devise strategies that simplify and expedite the consenting process, minimising risks between the issue of offtake agreements and final investment decisions.”

Ben Warren, EY Renewables Corporate Finance and RECAI Chief Editor, adds: “The UK’s recent challenges in the offshore wind sector echo a broader, global struggle. When auctioning contracts for offshore wind generation, governments need to reflect economic conditions in the design of the auction. Considering moving away from cost-only auction formats and incorporating factors other than cost, such as environmental considerations and jobs creation, would boost the supply chain, improve deliverability and benefit wider society.”

The top three RECAI markets remain unchanged. The US retains first position, helped by significant solar growth as a result of incentives from the Inflation Reduction Act. Germany remains in second position, having experienced substantial growth in its onshore wind sector; new capacities installed by the end of September surpassed the total installed in 2022. And despite halting national-level subsidies, China continues its upward trajectory in offshore wind, maintaining its overall third position.

The Nordic countries continue to pursue their renewable energy ambitions, with Denmark, Sweden, and Norway climbing two, three, and five places respectively.

Japan slips three places to 13th position. Despite abundant potential renewable energy sources and a commitment to reduce fossil fuels, it is falling behind other leading economies in terms of solar and wind deployment. Similarly, Chile drops two spots to 16 th position. Notwithstanding new battery storage targets, Chile continues to struggle with intermittency issues due to solar curtailment across the country.

Visit https://commercial.allianz.com/news-and-insights/news/offshore-wind-opportunities-risks-press.html to download the full report