There are significant risks in the development of Floating Offshore Wind (FLOW). At the early stages of development, issues related to lease availability, grid connectivity, consenting and revenue contracts will be priorities to project developers. However as industrial build-out looms, thoughts turn to the wider implications of scaling up. The resultant industry will need to evolve from megawatts to gigawatts in a few short years meaning a significant amount of capital will need to be deployed not just into the projects, but also into infrastructure and supply chains.
Key to this will be how, and by whom, the significant risks incumbent in this evolution are addressed to secure the necessary investment, finance, and insurance across all elements of the FLOW industry. Does the unique challenge presented require different approaches and, if so, are there unintended consequences and opportunities that could arise?
To gain a better understanding and identify potential areas for further work, the Cornwall FLOW Accelerator, funded by the European Regional Development Fund (ERDF) and led by Celtic Sea Power, organised a Risk Roundtable in April 2023.
The roundtable brought together experts from the insurance, finance, legal, and supporting industries to discuss their key concerns and consider possible solutions that better address the risks in this emerging and highly complex industry. This article summarises the outcomes of these discussions and considers whether such solutions could provide opportunities for the Celtic Sea Region and the broader UK.
So, what were insurance, finance and legal experts concerned about?
All agreed that right at the heart of the industry is the challenge of the interface between the foundation and the turbine. In fact, interface risk across the entire FLOW system is a challenge which needs to be overcome. The absence of a vertically integrated approach to the “floater” coupled with a confused view on an Operations and Maintenance (O&M) strategy (which will need to consider turbines, blades, foundations and balance of plant holistically) concerned all.
When we considered an insurers requirement for at least 8,000 hours of problem-free operation for a combined system to be considered proven, there was an interesting debate to be had around the drive towards larger turbines (reducing Cost of Energy through scale) as opposed to setting standards based on current proven combinations before scaling up (reducing Cost of Energy through reduction of risk).
What was universally agreed was the addressing the reduction of actual risk should involve allocating it to the entity best equipped to manage it. More specifically, inherent risk should be allocated to the pot of deployed capital where it can be best managed (Insurance, Finance, Equity, State). Currently, we are not “solving” risk but just pushing it around. For example, Insurance capital should not be subsiding Research & Development and/ or paying for Return on Investment. It is there to cover fortuitous losses only.
Moreover, there was a general view that current multi-contract or EPC “wrap” contracting strategies both had their limitations, including increasing interface risk or complex implementation respectively. Future contracting strategies should ensure that actual risk is allocated where it can be best be managed, understanding that there is no holistic approach to operations with turbine, foundation and balance of plant warranties all sitting with different suppliers.
It seems clear is that there is a realistic understanding of the challenges that FLOW presents, and it was positive to learn that Insurers’ risk engineers have formed a Joint Natural Resources Committee, working closely with the World Forum Offshore Wind, to describe the range of FLOW risk issues and therefore to prioritise them.
The top five issues for insurers?
Notwithstanding the very wide range of identified FLOW risk issues, the insurance experts felt that the areas requiring most attention included;
Cables: Concerns regarding inter-array cable claims in Fixed wind are impacting risk appetite towards FLOW. It is possible that the use of dynamic cables in FLOW may help reduce failure rates (as they are designed to move, unlike fixed wind static cables), but limited data is available on long-term wear and tear. The current lack of FLOW installation and O&M standards and industry guidelines was emphasised. It was noted that cables are currently excluded from project certification, whereas in practice, cable losses are the most frequent cause of claims in offshore renewables.
Moorings (lines and anchor systems): Ensuring redundancy in station-keeping for continued generation/operation in case of failure is considered crucial. Balancing redundancy with cost reduction poses a challenge, and more thinking on the impact on levelized cost of energy (LCOE) is needed. Increasing loads and differing seabed conditions, along with the lack of standardized technology variants, add complexity to mooring design. The need for updated natural catastrophe marine insurance methods and guidelines specific to FLOW was highlighted.
Supply Chain Constraints: Insufficient port infrastructure for laydown, floater assembly, integration, and wet storage poses a risk. Supply chain crunches and concerns about the availability of local capabilities, as well as vessel availability for offshore installation, further contribute to the risk. Clumsy local content requirements may lead to sub-optimal choices. Focus must be on the inherent benefits of localised solutions including resilience, availability, carbon-reduction and social benefits to ensure logical and competitive options are available.
Operations: The decision between in situ/offshore maintenance and tow to port has significant cost and insurance risk implications. Proper planning for the operational life of the wind farm, including condition monitoring, inspection, and spares strategies, is crucial. The lack of historical data and experience for FLOW leads to challenges in calculating insurance events, resulting in higher premiums and coverage limitations. Operational limitations being “baked in” during the design phase without sufficient consideration of installation and O&M requirements is a real concern. Consideration must be given to the issue of vessel availability and volatility of costs.
Contractual risks: The complex chain of risk and liability for FLOW and lack of long-term contractual commitments for major components poses major challenges. Challenges that could be painfully felt down the line; ultimately in the form of costs through the supply chain and the wind industry at large. Current contracts, such as FIDIC and LOGIC, may not be well-suited for FLOW projects. Insufficient warranties and insurance coverage for areas of high uncertainty/low predictability also contribute to the risks.
The view of project financiers
It was interesting to note that the perspective of insurers and project financiers was subtly different, shifting the weight of concern from; (a) how to reduce unacceptable/worrying levels of FLOW risks for insurers, to (b) unmitigated risks falling within the risk appetite of project financiers.
There is always the ultimate risk of losing money! However, the key risk to project financing is that is a project doesn’t develop as fast as it could. There is a view that the availability of project finance is not a bottleneck to speed of project development, however the availability of insurance, ports, grid and an acceptable Levelised Cost of Energy are.
Unpacking that further, it was noted that projects with a Contract for Difference or Power Purchase Agreement, consents, insurance, and prime contracts in place are not difficult to finance. In fact, because of the increasing interest in financing FLOW, higher insurance premiums due to compounded risk may not be an obstacle to raising project finance, even if costs and risks are higher than otherwise (within limits of course). Conversely, capital for technology, supply chains and ports is not as easy to come by due to a lack of long term contracts. Given that these are identified as bottlenecks of concern, there is a conundrum which needs solving.
So, what are the solutions?
Based on our discussions, there were some significant areas of focus which could play a part in solving some of the identified concerns;
Unlocking capital for infrastructure and supply chain. Ideally, we would establish an approach which establishes long-term contractual commitments for major supply chain components (ports, floaters, cables) to enhance finance opportunities. This could be used to encourage the participation of locally anchored EPCIs companies willing to take on contract interface risks. Fit-for-purpose contracting will be essential to this. However, the de-risking mechanisms to make this a reality require some thought. UK Export Finance products are possibly relevant to FLOW, and increasingly more flexible, whilst the proposed UK Home Shipbuilding Credit Guarantee scheme could also be an option for de-risking substructure manufacture by providing access to finance for underwriting contracts.
Early definition of operations and maintenance strategies. Sooner rather than later, determine the approach for maintenance: either in situ/offshore or tow to port. This should consider proper planning for the operational life of the wind farm, including condition monitoring, inspection, and spares strategies.
Co-ordination, Collaboration, Standardisation. The industry needs to see developing standardisation early in the industrialisation phase in order overcome insurers concerns about prototypes and to optimise available infrastructure and supply chains. Coordinating efforts among project owners and critical suppliers can facilitate the pooling of resources and coordination of activities such as integration, floater assembly, and early port infrastructure investment. Examples from other industries, such as the telecoms industry’s Atlantic Cables Mutual and 1980s era Oil and Gas North Sea partnering strategies show that collaborative approaches can ensure smoother operations and reduce risks.
What opportunities does this provide to the UK?
Whilst there are clearly challenges to overcome, there are opportunities which arise from that need. What was clear from our discussions (with the global leaders in FLOW insurance) is that there are no solutions ready in other markets, so there are first mover advantages to grab.
For example, considering the key areas of concern and possible solutions, the possibility of commercial club approach to such areas as moorings, cables and wider O&M could provide project owners with priority access to locally based vessels and common spares. The club approach could help ensure supply resilience and redundancy factors, particularly in terms of integration, floater assembly, and early port infrastructure investment. The concept could drive long-term vessel charter or purchase to mitigate weather and spot price volatility.
If this approach was underpinned by “fit-for-purpose” contracting and supported by UK de-risking mechanisms for the early projects, then there is a golden opportunity to build on UK capabilities and develop regional supply chain resilience.
Looking at opportunities to re-write the commercial playbook to meet FLOW’s de-risking needs, coupled with intelligent use of Government resources to underwrite uninsurable risks or coverage gaps (particularly in the early years of build our), will provides us with a once-in-a-generation opportunity to transform our industry.
The UK should be ambitious in its aspiration. The real opportunity of FLOW is to ensure that our indigenous energy markets are delivered – on time and by competitive UK companies.
The discussions held during the roundtable were conducted under Chatham House rules, ensuring the privacy and anonymity of participants. For a copy of the notes, and/ or for further information regarding our work, please visit www.celticseapower.co.uk.
Celtic Sea Power Ltd, on behalf of the Cornwall FLOW Accelerator, would like to express our gratitude to the experts from Renewable Risk Associates Ltd, UK Export Finance, ABL Group, Burges Salmon LLP, Foot Anstey LLP, Riskpoint A/S, Axis Capital, Norwegian Hull Club, Centre for Local Content Innovation and Green Giraffe Advisory who contributed their time, expertise, and enthusiasm to this exercise.
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