When you’re investing hundreds of millions of dollars, or even billions, to construct an offshore wind farm, insurance becomes a necessity. With Rhode Island on track to host one of the first offshore wind farms in North America, the state may also claim the first offshore wind policy.
Deepwater Wind must carry insurance under an agreement reached with National Grid to sell the utility electricity from its proposed eight-turbine farm off Block Island. The five pages of fine print outline policies to cover construction accidents, chemical spills, and incidents involving aircraft, automobiles and ships. For general accidents Deepwater must insure against claims of at least $1 million each with an excess liability policy providing for up to $4 million claims.
Providence-based Deepwater Wind declined to comment for this article.
However, those in the insurance industry said lenders and investors typically demand such policies when huge amounts of money are at stake. In the case of Deepwater, the project is being backed by D.E. Shaw & Co., a New York-based investment firm with $21 billion in investment capital.
“If you don’t have an insurance policy and something goes wrong, unless you have access to unlimited funds and financing behind you, you have a real problem,” said Peter J. Mavraganis, a senior vice president at Marsh Inc., a global insurance broker.
There is plenty that could go wrong. A ship carrying critical parts could capsize en route to reaching the wind farm site. An accident during construction could damage a multimillion-dollar ship. A storm could wash out a substation.
Developers and their backers tend to worry most about events that stop electricity flowing to the grid and cut off revenue. Another big concern is that a delay in starting construction could jeopardize expiring tax credits or financing opportunities.
Insurance companies typically will not pay for delays caused by holdups in government permitting. But they will pay if equipment is damaged on its way to the site or a physical event postpones construction.
“The clients are very interested in exploring that coverage,” said Pat Milner, who runs the offshore energy division at the Navigators Group Inc., a New York City-based insurance holding company.
Deepwater Wind has said keeping its Block Island project on track for a 2012 start date is critical to securing expiring federal tax credits that reach into the tens of millions of dollars. It’s unclear if the company is seeking insurance to protect itself if the project fails to start on time.
Insurance brokers say such policies are common but highly specialized and often part of comprehensive packages involving multiple insurance companies.
Just how much Deepwater will pay for insurance is difficult to tell. Insurance executives say every project comes with its own characteristics, from the soil holding the turbines to the requirements of investors.
Mavraganis said generally insurance during the construction phase comprises between 0.8 percent and 1.25 percent of the total cost of the project cost. In the case of Deepwater Wind’s $200 million Block Island project that would translate to about $2 million. The developer says a second farm with 100 turbines proposed for farther offshore could cost $1.5 billion. That potentially means a $15 million insurance tab. Generally the risks, and insurance price tags, go down after construction finishes, Mavraganis said.
Jim Lanard, head of the Offshore Wind Development Coalition, said developers of large-scale projects with 100 or more turbines typically expect to pay $10 million to $20 million a year for insurance. The final bill comes after protracted conversations with engineers for the insurance company who pore over construction documents and multiple risk studies.
“A good developer will bring in insurers very early in the process,” said Lanard, a former a managing director at Deepwater Wind.
That leaves time for developers to incorporate suggestions to lower risks made by insurance companies that then lower premiums. Virtually all of that expertise comes from Europe, a continent with an almost two-decade history of building offshore wind farms and a mature insurance market. With the United States looking to build farms, some European insurers are sending personnel to America and opening offices.
“We’re always keeping an eye out for different markets and sales,” said Ferdia Burns, a marketing manager at the Irish-based Keystone Insurance Group. “Certainly we’ll be interested in every market.”
But insurance company executives said they are not champing at the bit to insure the Rhode Island project. The proposed wind farm is just one of at least a handful proposed for the Northeast waters and no one is sure which will be first.
“We’ve been conscious of the fact that the U.S. market has been talking a lot about wind farms, but until projects like this actually come up we will react to it wherever it goes,” Milner said. •
