Managing offshore wind project risk in natural catastrophe-prone Asia-Pacific

Managing offshore wind project risk in natural catastrophe-prone Asia-Pacific | Insurance Business

Managing offshore wind project risk in natural catastrophe-prone Asia-Pacific

As the renewable energy sector in Asia-Pacific grows, so do concerns on the impact of natural catastrophes on offshore wind turbines and business continuity. Andre Martin, Head of Innovative Risk Solutions APAC, Swiss Re Corporate Solutions, offers some insights on the exposure and possible mitigation strategies. The views expressed within the article are not necessarily those of Corporate Risk and Insurance.

The coastal waters of Asia are ripe for wind power generation. China is well on track to expand its offshore wind generation capacity and develop 5 GW of installed capacity by 2020. Meanwhile, Taiwan has given the all-clear for a total of 5.5 GW of offshore wind projects that are due to come online between 2020 and 2025.

Wind power generation in Asia continued its robust, double-digit growth during 2018, largely driven by new installations in China. As the sector takes off, developers and operators in Asia are growing into largely untested waters and are casting a wary eye on the region’s natural catastrophe vulnerabilities.

One of them is typhoons. Super Typhoons Usagi (2013) and Soudelor (2015) both caused severe damage to onshore wind turbines in China and Taiwan, while last year saw several turbines toppling over in Japan during typhoon Jebi and Cimarron.

To date there is, however, still very limited experience with typhoon resilience of wind turbines, and next to none for offshore turbines. Given the vast majority of current offshore windfarms are in European waters with more benign storm exposure, lessons learned have their limitations.

Earthquakes are another concern, particularly near the coasts of Taiwan and Japan, which are known for seismic activity. For earthquake there is even less experience around the resilience of wind turbines given the lack of exposure in Northern Europe, where the majority of turbines are located. However, the damage caused to submarine telecommunication cables following landslides created by a M6.4 earthquake in Taiwan in 2010 illustrates the risks.

With most sites for new offshore wind turbine projects at risk of typhoons and earthquakes, these risks will need to be managed carefully as the industry takes off. In Swiss Re Corporate Solutions we are working closely with the industry and academia to better understand vulnerabilities and come up with viable solutions.

Are floating foundations the solution?
Floating wind farms are one possible solution to mitigating some of the risks posed by earthquakes. Apart from being more resilient to ground shaking, the advantage of floating foundations over fixed bottom turbines is that they can be installed at any depth by fixing them to the seabed using chains.

So, it is not surprising that Japan, with both high earthquake exposure and very deep waters close to shore, is the most active market in developing and testing new alternative foundation designs.

Currently, a number of floating foundation types are being piloted in Europe and Japan, and while there are a number of technological hurdles yet to be overcome, the most significant challenges are commercial.

Filling the gaps with alternative risk transfer solutions
One main concern becoming increasingly apparent for projects operating in areas with high NatCat exposure is that affordable insurance capacity may become harder to secure as the sector develops. Insurers and reinsurers have to manage and control risk accumulation and therefore can only underwrite a certain amount of catastrophe exposure for any one defined area.

If you look at the speed at which the offshore wind sector is growing in Taiwan, China and Japan, then there’s a question mark around whether conventional insurance products will be enough to deal with these exposures.

Taiwan, for instance, will have 5.5 GW of installed offshore wind capacity on its East coast by 2025. This represents a value accumulation of around $20 billion, with the vast majority concentrated off the coast of Changhua county. With such high asset values being installed and exposed to natural catastrophe perils such as tropical cyclones and earthquakes, traditional insurance markets will struggle to deploy such massive capacity and take on the risk.

This is where alternative risk transfer solutions, such as parametric insurance, offer a way to plug the gaps and complement traditional indemnity insurance. Parametric insurance has proven to be an efficient instrument to access additional, alternative capital markets outside the insurance world for such peak risks via insurance-linked securities (ILS) and cat bonds.

However, the damage that natural catastrophes directly inflict on installations is just one part of the equation. With high exposure of installations to the elements, project developers and investors also need to consider the financial impact of delays and business interruption caused by natural catastrophes or adverse weather. Again, index-based insurance can help to mitigate or transfer the risks.

One example particularly relevant for offshore wind farms is weather downtime protection, which insures cost overruns and project delays due to inclement weather. For example, inclement weather causes stormy seas, preventing vessels from accessing the construction site or to perform high precision lifting works, which are already challenging in calm waters.

With offshore wind still being a nascent industry in Asia, the lack of local experience and missing supply chains in the region add to the complexity. Replacements of key equipment that would take a few days to procure in Europe could take months in Asia.

Developers, investors and insurers are acutely aware that offshore wind in Asia is growing into unchartered waters. The high exposure to natural perils changes the fundamental risk profile of projects and it is crucial to adjust the lessons learned from Europe for Asia.