Riesgos de energías renovables y de construcción

NARRATOR: Welcome to the WTW podcast Construction Blueprints, where we discuss the latest risk- management and insurance trends, as well as issues facing the construction industry. We'll speak with a variety of construction leaders and experts on global topics who can help provide you a blueprint for building your industry knowledge.

MIKE VENABLES: Hello, everyone, and welcome to our Construction Blueprints podcast. I am Mike Venables, the broking leader for GB Construction, your podcast host. In this episode, we are going to talk about the challenges in the renewable energy sector that owners, operators, underwriters, and brokers alike experience, from both a technology and project risk standpoint. I'm delighted today to be joined by Maria Sanchis, the regional construction leader for LATAM.

MARIA SANCHIS: Hello, Mike. Thank you so much for the invitation.

MIKE VENABLES: Thank you for joining. And Steven Munday, the natural resource global renewable energy leader.

STEVEN Munday: Hi, Mike. Thanks very much for inviting to contribute to your podcast.

MIKE VENABLES: Thank you for joining. And joining Maria and Steven, we have Alan McShane, the natural resource global leader for risk engineering.

ALAN MCSHANE: Hi, Mike. I'm happy to be here today, and I'm looking forward to the discussion. MIKE VENABLES: Thank you, everybody. So as we continue our journey towards net zero, the energy industry is evolving at a faster rate than ever to get us there by producing and connecting more clean energy. This means more innovation, more technology, and a lot more creativity. From a technology perspective, Alan, is construction risks in the renewable energy sector becoming more challenging?

ALAN MCSHANE: Mike, that's a great question. I think it's extremely nuanced. We have lots of different technologies that we're looking at within the sector-- hydrogen, battery-powered storage, offshore wind, onshore wind, and a bunch of other technologies besides that there's probably too many to go into here in this particular segment. But they've all got a [INAUDIBLE] challenge around technology readiness, I think, is one of the pivotal areas.

And in that space, I would say there is a greater challenge for the construction sector. I think because of the nature of the renewable space and the fact that there's such a high demand and expectation for development and growth in this area, that development is happening at a rapid pace. And I think everybody needs to become more accustomed to that, which means there's a lot more nuanced technology, prototypical in nature to some degree.

Now, that in itself is not a problem because in the past, we have dealt with technology issues by engaging in a more collaborative and detailed way with the various stakeholders, be it licensors, project sponsors, and insurers alike. So we have got the framework to address these issues. But I do feel that there is more of that, and this will scale accordingly. And I think we need to be aware of the issue that the technology readiness level is not quite there in some areas. But with partnership between all different stakeholders, I think those risks can be managed to an acceptable level.

I think the other area that we need to consider very carefully here is the rate of development, which I hinted to a minute ago. I think that is one of the key areas that needs to be focused on as well, because with the rapid development, there is a tendency, and there is also a pressure on all stages of the value chain, be it through the licensor into the individual component manufacturer into the construction of these operations, that is time pressures and a compression of the timeline from start to finish. And as a result, there's a need to be very cognizant of that pressure and make sure that well-tested and understood controls within the construction sector are maintained through that process.

For example, there could be pressures on individual component manufacturers that affect the QEC and the quality of the components coming through. And we know there is also some key issues in the construction of various operations as well. We've seen that on the offshore wind area where it's manifested in some of the cable installations that we've seen over the years. There's some QAQC issues there.

Now, beyond that, one of the other areas which maybe sits slightly separate to all these different areas is hydrogen. And hydrogen has a slightly different risk profile compared to the others. And the reason for that is because hydrogen itself is not just going to be an industrial type of energy vector or material.

There's also a desire for hydrogen to be a more commercial energy vector as well, such as replacing natural gas. That means it's potentially going to become more in contact with the general public.

And what that means, basically, is if you look at hydrogen as it currently stands, it's manufactured and consumed in highly restricted facilities where you've got lots of people with very good experience, be it engineers, technicians, operators. And that environment will change over time to where you're going to have a lot more contact with the general public who may not be as aware. And also, you've got a distributed asset as well in that space. So there's some nuances there.

But it's not a situation, necessarily, that's a bad thing just now for the construction sector because if we look at the nature of where we see the development of hydrogen in the near term-- and I mean the next 5 to 10 years-- what you're seeing is the development is in the industrial setting. So it's replacing natural gas in power stations, in oil refineries and petrochemical plants as an energy source. So in that sense, you can manage the risks accordingly.

And therefore, actually, the risk to hydrogen in the short term, the short to near term, is actually no different to what we currently deal with today. And then that gives us more time to work out what the actual risk profile is in the longer term if we move to that longer term use case where it may replace such things like natural gas.

So from what I said, I think maybe you can appreciate that there's no one answer fits all. I think there's a general increase. But I think what I'm trying to say here is that we have the technology and we have the know-how within the construction sphere to manage those risks accordingly, but we need to be more vigilant.

MIKE VENABLES: So I'll ask you, Alan-- the buzz word, as you quite rightly highlighted there, is the hydrogen sector here. Is this new, or have we seen this before? Is this brand-new technology being used, or is it a scale-up or an adaptation of what's been used in the past?

ALAN MCSHANE: Well, it's a bit of both, isn't it, because the generation of hydrogen is new because it's renewable, so you're using electrolysers in that space. There's technology nuances there. However, once the hydrogen is produced, the actual storage, transportation, and consumption of hydrogen is well understood. So the balance of plan, if you want to call [INAUDIBLE], away from the generation of hydrogen is actually technology that's been used for many, many years. And it's well understood.

And as I said before, because it's we believe that the near-term development of hydrogen is going to be in the restricted, highly regulated, highly specialized sector, I think the risks are manageable and understood. And then all you've got to deal with is the technology issues around electrolysers in terms of their efficiency and effectiveness. But that's more of a business decision rather than a risk decision from a construction perspective.

MIKE VENABLES: Alan, I think you made some brilliant points there. And what I'm going to do is I'm going to throw the question over to both Maria and to Steven. As a client servicing a broker supportive question, how are we seeing the markets respond to this new energy discussions?

MARIA Sanchis: Well, I think that the specialized, especially on the construction side, renewable energy markets, have ample capacity and appetite on paper. Now, we are seeing, I think, across the globe, and in particular my area in Latin America and Caribbean, that many of these markets are really not deploying the capacity that they have to its fullest unless it's best in class. So they're being quite selective, really, in terms of reputation of the contractor. Obviously, technology, whether it's prototype or not.

And obviously, that has also an effect on the level of bridges, especially on the defects and design elements, on the maintenance element, and also, at a certain point, in sublimits. So obviously, just like Alan said, all of this technology might not be new, but the market is still a little bit perceptive on all these projects. And globally, we've been seeing such an influx of projects in this space that they are being more and more selective on how they are actually deploying their capacity.

So for us as brokers and recommendation for our clients and whether they're developers or whether they're contractors, we do have to approach the markets, really, with a good story to tell. So it's important to have a good and complete submission. It's very important-- not only the basis of, obviously, location, and especially when it's natural catastrophe-exposed in terms of site-- it's very important to really know the risk management plan and mitigation plan that is going to be used throughout the life of the project. So I think that markets now are really looking not only on the technology elements, but really, how the project is managed, from its very early stages in terms of development, engineering, and obviously even manufacturing. I think it's quite important where-- not only the technology itself, but where the panels or the turbines or the main equipment and the critical equipment is coming from. So all these elements really have to be laid out in a very comprehensive way to really get the best results from the market.

And then, obviously, with this ample capacity, I think it's quite important how you access that capacity. We're seeing that, at the moment, for certain size of projects, local markets are being quite competitive. But obviously, when we're talking about the larger, more complex projects in terms of values, we're seeing with inflation, the values really increase. The same project that maybe was built five years ago, same technology, we're looking at increases in values in workforce and materials and transportation, which has a domino effect and a knock-on effect on the overall CapEx of the project.

So it's quite important to not only access with the right information, but access the markets at the right access point. So I think it's important to know the local appetite and also to access markets, obviously, in London-- we have the center of excellence, in many ways, and very centralized capacity-- but also look at the players. If you're an owner and you're working with a European contractor, obviously, and they're from Spain, there's markets that are actually based in Spain that are going to know more about the reputation of the contractor as well. So I think that those elements are quite important when you're laying out a strategy. And I think that's also very important. You have to have a strategy, and you have to stick to it.

MIKE VENABLES: Yeah, OK. Thank you, Maria. Steven, with so many new projects coming to the market, what is happening with the timeline compressions and to the global workforce supply chains? Could we have your views and thoughts on these three subjects?

STEVEN Munday: Absolutely, Mike. And I totally agree with Alan and Maria. And I think certainly, in terms of, firstly, the technology, renewable energy is no longer a power sector. It's a technology sector. It's moving ahead incredibly quickly. That does impact throughout the lifecycle in terms of origination, the procurement, the construction, and the operations. And that has an impact on the timeline as well.

Now, we are seeing these new technologies coming through. There's upscaling of existing technologies. We've talked about hydrogen. We've mentioned very briefly battery storage. There's wind technologies, which has been upscaled. So all of this equipment has to come from somewhere.

And we are seeing that the original equipment manufacturers of all technologies are trying to produce sufficient amount of technology for what is required globally. That is very difficult, and it is challenging the supply chain, particularly after the pandemic. And we are seeing that there is a major impact on projects' timelines.

I think when you look at the actual timeline for building projects and where, historically, renewable energy companies were over the last few years, there was very much a race to deliver as quickly as possible.

Sometimes that impacted quality. Sometimes the experience and knowledge of the available workforce wasn't there. And sometimes we had challenges with the workforce being aligned to local content which didn't have the right experience.

But the workforce and timeline compression is interrelated. And what we are seeing now more is that post-pandemic, where you've got the workforce, where you've got the original equipment manufacturers-- and they have had challenges, and it's been quite well reported in the press, particularly by the big wind OEMs, that they've had defects. They've had to make reserves against their balance sheets. They've had challenges with defects, which is well known in the industry, which they're trying to rectify.

They're now realizing, I believe, certainly from what we've seen, that the performance of their equipment and the delivery of the projects needs to be not just in time. And we're certainly seeing this as a strategy to mitigate potential liquidated damages for delay, not delivering projects, not delivering projects on time, not delivering them with the performance obligations that they have.

So there is, in some regards, a movement to move away from a less experienced workforce, just-in-time delivery of the projects, and the lessons learned from the pandemic, recognizing the supply chain interruption and availability issues, to be more considered about the projects, to build them with, actually, longer timelines and be more considerate to the delivery of long-lead equipment, whether it's power transformers or other wind turbines or electrolyzers, to make sure that these are available or planned to be more available at the project sites at an earlier stage, in a way, to mitigate potential supply chain delivery and to avoid-- effectively avoid delay damages, which have been highly punitive.

MIKE VENABLES: That is a question close to my heart, and we're hearing it and seeing it and all classes of business. But you mentioning the supply chain concerns that you have, does this have an [? enhancement ?] to the DSU exposure that the client is incurring?

STEVEN Munday: It does. I think there's an additional exposure, but there's also risk mitigation. What we're seeing is there's a knock-on effect in the insurance industry by contractors and OEMs taking greater responsibility to avoid, maybe, liquidated damages, to have longer construction periods for their projects, bringing long-lead equipment on site at an earlier stage rather than a couple of weeks before installation and before testing commissioning. They are naturally building in additional margin to projects, which is making the projects more palatable to the risk and insurance community because there's built-in mitigants for delay and startup arising from physical delays or delays in commercial operations.

So there is that positive knock-on effect by having a natural built-in risk mitigation by the supply chain and the contractors. But separately, from an insurance perspective, we are seeing historically with operational projects, there are the indemnity periods that are currently put forward. Are they appropriate?

We are aware of many in project finance [INAUDIBLE] across lender-financed projects where maximum dem-- minimum debt periods are 12 months. Maybe they're 9 months. And we know that's geared towards the longest lead item, which is generally the step-up transformer or the general transformer. And at the moment, we are seeing, generally, the industry having 12-plus months as a lead-in time.

So there's two consequences of that. One is, should indemnity periods be extended to accommodate and recognize the longer lead times of the key equipment? And there's also response by the insurance market that if the indemnity periods are not extended and the insurers with their insurer engineers feel that they are being penalized on a first-loss basis for the cover that's provided in the shorter indemnity period being more likely to be exposed to loss of revenue risk, they're likely to increase the terms and conditions.

So from a broker perspective, we're trying to work with our clients to understand if they have any framework agreements in place. Are they talking to the OEMs about the current lead times for key equipment? Positioning that with insurers, making sure they're comfortable, making sure that the cover that they're buying is appropriate to the new considerations that we are seeing in the marketplace.

MIKE VENABLES: So Steven, some excellent points raised in your comments there. And I'm going to ask a difficult question here and play devil's advocate. Are the financing of projects pushing project sponsors to shorter project timelines instead of more manageable levels?

STEVEN Munday: I think there is still a high demand, obviously, for renewable energy projects. There's very available debt-financed project finance to move those projects forward. Many of the projects are still supported by [INAUDIBLE] subsidies regimes.

There is a very attractive and buoyant electricity power generation market in terms of the spot market and very attractive PPAs. So whether it's the financiers that are driving the projects to be delivered more quickly, broadly, I would think that the lenders and the debt financiers and the multilaterals are a little bit more risk-averse. They're in for the longer game. They want it to be built, and they want it to be operated satisfactorily with good workforce, delivered in a robust way.

I do think maybe the sponsors are taking advantage of the opportunity with the electricity market, the high spot market. The revenues are very strong. That does encourage projects to be completed more quickly. But again, to Maria's point, it really depends on the type of client-- if you're a developing client, if you've got a long-term interest in the project, and how you might manage that if you are looking to build and operate it for maybe 20 to 25 years.

So I'm not necessarily seeing the lenders driving timeline compression, but we are seeing the opportunity to move quickly is being very well supported by the industry and the desire to have an ESG clean net- zero power generation. So that is creating a positive impact to delivering projects. But we're obviously working with our clients and insurers to make sure that it's delivered in a most robust, risk-mitigated way as possible.

MIKE VENABLES: Thank you. Thank you very much, Steven.

ALAN MCSHANE: Is it possible I could ask Maria a question if that's OK? I was interested to hear Maria talk about that insurers have been highly selective in their selection of projects they want to underwrite. Do you believe, at this stage, that the selection process that we're going through is limiting development and adoption in the sector?

MARIA Sanchis: I can't really say the direct impact. But definitely, lenders are being a lot more flexible in terms of the guarantees and the coverages that are being put forward as minimum requirements. So I think that there's more flexibility in that respect where before with the softer market, we saw them pushing really hard, for example, for leg 3. Now they're being a little bit more flexible in the sense that they know that we want to insure this. We don't want markets to turn away or walk away from a deal because they can't get the level of coverage that is expected.

So I think that we're not in the face of it's not insurable yet. We are-- for example, in some spaces in hydro and maybe coal fire, I think that renewable projects are definitely insurable. And I don't think that lenders are walking away from deals or maybe deals not being materialized because of financing. But there is always a fine line between that pressure from the lenders and, really, what the market's willing to offer.

So like I said, that negotiation-- definitely, at the moment, I think that the markets have a little bit more of the upper hand in that respect. And if you want quality, security as well, you have to put everything in perspective. But we're not there yet. I think that renewable projects are definitely insurable, but obviously-

- and I think that that's a point that Mike wanted to also bring up-- is also where they're located. So when there's that natcat exposure-- and I'm quoting Steven on his latest report-- the increases in pricing are a little bit jaw-dropping.

So sometimes, you're working with the margins. When you're talking about low margins, especially for some contractors, they're thinking insurance might make them consider walking away or not. So I think that the natcat element, especially in areas where there's wind, high wind, like the Caribbean, Gulf of Mexico, coast of Florida, those, I think, they need higher consideration in terms of-- not insurability, but really look down at their bottom line and maybe the revenue stream impact in terms of insurance costs need to be reconsidered.

ALAN MCSHANE: OK. So do you think that-- you're thinking, how do we enhance the communication in the sector? Because obviously, if we can bring all the parties together in a lot more collaborative environment so we share more, we collaborate more, do you believe that is an opportunity for us to access more capacity in the market to allow projects to move forward quicker?

What do you think about that approach? I know we do quite a bit of that already, but I'm thinking of having to take it to different level, as I mentioned, because of the technology issues and stuff, to bring people into the discussion a lot earlier in the process so they feel more comfortable and have a keen understanding of the project as it develops.

MIKE VENABLES: Definitely. And like I said earlier, it's really about a good story to tell. There's many projects that are actually being managed in an excellent way. And somewhere along the process, it's not being maybe put forward to the market in the best possible way. And also, I think setting expectations in terms of putting the parties together at an early stage.

I think from an EPC perspective, setting those minimum requirements and flexibility within the EPC is important, but having that flexibility from lenders as well in their term sheets to be able to meet that. Because at the end of the day, we're all going towards the same goal. We want the project to be developed. We want that project to be financed, and we want that project to be insured in the best way possible. So it's just getting that balance right and setting expectations from early stages.

ALAN MCSHANE: Because I think it's interesting to note that in many projects, from my experience, that there's a lot of-- as we mentioned before, a lot of elements of these projects that we're involved in are aspects of current projects or past projects over the years. So I think it's important that we help everybody, all the stakeholders, to differentiate between what existing technology may be used in a slightly different way or existing technology or new technology. And then we can hone in on the areas that are more concerning for everybody and then work on them together to try and alleviate those concerns.

MARIA Sanchis: Definitely. Like you said, sometimes the technologies just scale up. Maybe we have haven't reached the market standard of 8,000 of operation, but we know that there's certain projects that are being developed in other parts of the world that once that particular project that is considered prototype goes into testing, we know that we're going to have results to get back to the market.

So again, that flexibility should be there. And I think that that's early-stage conversation. And also, I have an example-- knowing contractually, too, where the obligation lies. We had a manufacturer working in one of the islands in the Caribbean where there was going to be a long period of storage because of that supply chain disruption. And the markets were very concerned about material being stored in a very exposed manner during the hurricane season. And we saw that contractually, actually, the obligation were laid on the manufacturer and not so much on the project developer or the sponsors.

So we also need to know where the risk allocation is, and not only insurability, but also where the risk lies in terms of contractually. And I think that's more into Steven's space.

STEVEN Munday: I'll just comment, actually, on the net cap, because I think that that's incredibly timely and interesting after the 1/1 treaty renewals. We have seen the insurance market go through a hard market where there's been a constriction of capacity and supply and increase in terms of conditions, more limited terms and conditions for our clients. We were, with new capacity coming in, which was ESG- driven, starting to see leveling of the insurance market last year. But towards the end of the year, we had the treaty renewals. And we are seeing now, probably, the greatest impact from natcat to reach the markets, as well as the international markets.

And because the natcat withdrawal of some of the restrictions, some of the treaties, is pro-placing greater risk on the domestic insurers, the direct insurers where they don't always have the treaty protection, that, again, it's reducing capacity and appetite where the direct insurers don't have the treaties for the additional support to lay off risk. Now, that's reducing capacity. It's increasing connectivity with the international marketing hubs without needing to underwrite, technically, these risks. And we are also seeing lots more renewable energy projects that are being delivered in more challenging territories around the world than we've ever seen before.

And we now have, with the climate initiative, much more unpredictable weather patterns, as we've seen around the world, from wildfire and droughts and natcat events. So it's becoming increasingly difficult for what the insurance market wants to be a technical market. It does look very closely at all risk factors,

particularly in natcat, and is trying to run its models, trying to understand the technical design specifications of the equipment that's been deployed for that occupancy in that location. But it doesn't have the history to rely on anymore.

So we are seeing great challenges with the new projects. And as we mentioned earlier, some of these new projects, they're not small projects. We're looking at big utility-scale projects being deployed in Australia and wildfire zones in California, in Texas. And risk and insurance is moving very rapidly up the discussions in the boards about whether the projects are viable or not and what is the predictability of insurance costs for those projects over the financing terms, which is very difficult for all of us. We don't know how the market is going to perform.

And what we are seeing-- we've got historical projects that were maybe financed 5 or 10 years ago, and the market is starting to constrict. And that's now having an impact on the lender mandate requirements which were put in place at financing, which are now increasingly difficult to deliver at the same premium. And that is having a major impact on projects' profitability, almost viability in some areas. And we're then seeing the need, relative to maintaining costs or maintaining cost at the regional level, to reduce some of the cover.

Now, that then brings it into, for natcat, insurers are trying to impose sublimits. We spend a lot of time, as you know, Alan, with the engineers, trying to work out PML studies and what's appropriate, particularly for renewable energy projects where we've got a large footprint, maybe not the single footprint with a CCGT or coal-fired [INAUDIBLE] project.

How is it going to be exposed from a [INAUDIBLE] perspective? And that is something that's really been brought into that risk transfer cost and the appropriateness of the PML studies going forward. I mean, Alan, we're doing a lot of this at the moment, and it's highly impactful for our clients and the level of transfer that we put to the markets.

ALAN MCSHANE: Indeed. I mean, it's something that's very, very keen for me, from my point of view, being the lead on risk engineering, to ensure that we build out our loss estimate analysis at the construction and early operational phases to ensure that there's a keen understanding of what those risks are over the entire project cycle, from inception through to final handover into operations. And that's an important factor. And obviously, with the increased issues around natcat, that's definitely an area that we are working very hard to ensure is covered in those analyses.

MIKE VENABLES: So Steven, Alan, Maria, you've made some very valid points there. And the million- dollar question on my mind is the global inflation versus escalation up-flips. How are we ensuring that the right values are being insured?

Before we ask our guests to answer this question, we're going to take a break. There's so much to say on the topic, we're dividing the conversation into two parts. We hope you join us for the continuation of our discussions with Steven, Alan, and Maria. And thanks for listening to Construction Blueprint.

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SPEAKER 1: Welcome to the WTW podcast, Construction Blueprints, where we discuss the latest risk management and insurance trends, as well as issues facing the construction industry. We'll speak with a variety of construction leaders and experts on global topics who can help provide you a blueprint for building your industry knowledge.

SPEAKER 2: Welcome back to Construction Blueprints episodes on renewable energy. In this episode, we're presenting the second half of our conversation with Steven Munday, global renewable energy leader, Alan McShane, global head of engineering for natural resources, and Maria Sanchis, head of construction Latin America, and will resume with the million dollar question.

So Steven, Alan, Maria, you've made some very valid points there, and the million dollar question on my mind is, the global inflation versus escalation uplifts. How are we ensuring that the right values are being ensured? Steven?

STEVEN MUNDAY: Yeah, it is a challenge. I think most clients, contractors are not operators. They're obviously aware of the macro inflationary impact. They are looking at what it means to them in terms of their reinstatement values.

We see many clients engaging independent valuers. We see other clients who are regularly bidding for projects, working with their internal teams to assess what inflation means to the current cost of projects. Ultimately, there is the responsibility to insure for new reinstatement value frequently, particularly for finance projects. This is underpinned by a mandated requirement to the lenders to make sure that you're insuring for appropriate NRVs.

So on the PD side, we are seeing increases flowing through, and it is a very difficult process because of the consequence relative to the technical rate increase plus the rate of inflation or increase to the assets, which frequently, unfortunately, is creating double digit increases in premium models. So there is that factor, and there's also the factor around loss of revenue, which, as I mentioned earlier, there's quite a buoyant market at the moment.

We are seeing inflationary increases on what was predicted revenue streams in a positive way sometimes for clients, and many times, it's capped out by different governments. But that has to be brought in a factored into the insurance risk transfer proposition together with, as we mentioned, the length of time that you're paid for the loss of revenue. The indemnity periods, are they appropriate? 12, 15, 24 months.

ALAN MCSHANE: Steven, in your view, is the global inflation, it's not uniform. In my view, I don't think it's uniform. I think it's nuanced. I think that's the challenge that the projects and valuation entities have with this situation is that it might initially been say, back in the beginning of 2022-- inflation was basically high across the board. But now, it's more patchy. Would you agree with that, or do you have a different view? STEVEN MUNDAY: No, I would agree that it's on an a macro level, globally, it is patchy. We haven't seen a common 5% or 10% increase across the board. Each project is individual. It has different supply chains. It has different periods in time when it was last revalued. The inflation on the project is not just for the assets as well. It's about the labor costs associated with reinstating those assets.

So there are factors in there which are variables, and I would agree that a lot of the international rating agencies, the value is they will have to take a different view. And they were also looking at from a current or historical perspective, and it's very difficult to anticipate where inflation is going at the moment. I mean, in some territories around the world, we are looking at a leveling of global inflation. Obviously, it's predicted for mid-year for 6% in some areas, but that's a leveling after potentially a 5% to 10% increase across the board depending where you are.

MARIA Sanchis: This is also one of the reasons why markets are taking a very selective and conservative approach to participation and the percentage or written lines that they're offering also because of inflation. Because obviously they want to make sure that they're partners to the project, and they can actually retain and remain on the risk through the project life cycle that they've written throughout the period.

So I think that part of the problem of markets not deploying their full capacity is to really give that cushion for inflation. And I think that this inflation and period has really taught us a lot actually and put to the test a lot of our escalation clauses on how they actually work and the intention of them. And let me tell you, you will have very different answers from different brokers and different markets on how that actually works and especially in case of a loss.

So I think that many of these are going to be rewritten, whether they're eroded or not, once you reinstate, for example. We've learned quite a bit through this process where I think before, they were kind of there with a good intention but were never tested.

SPEAKER 2: Yeah.

STEVEN MUNDAY: I totally agree on that, Maria. The escalation provisions would definitely-- there's going to come a lot of pressure with insurers. Will there be a chargeable extension going forward, and are they appropriate for the current values where maybe clients are seeking to rely on that escalation clause to capture an inflation reading crashes and increases on the CapEx and OpEx that that is going to be a major impact going forward.

But we're also seeing insurers, it goes to the basis of insurance, which is common, reasonable contribution to the pool. Are our insurers seeing the right level of premium for the risk exposed? And we know that, obviously, if the premium is geared to a $1 million project but it's currently got a value of $1.5 million, then you're more likely to have a risk in the first half a million. So there's a first loss element, and we are seeing insurers where there's been no inflationary or acknowledgment of increase in CapEx or OpEx values increasing their rate to compensate for the fact that they're more likely to perceive a claim as a first loss.

MARIA Sanchis: No, and also we need more insurance in the panel, so it's more difficult to get a consensus in terms of limit and pricing. So that's also driving up, I think. And we started to see some

stabilization of rates, I think, at the beginning of 2022 last year, but that kind of came to a halt, I think, because of this.

It takes more time as well to sit down with insurance and come to a consensus. That's another thing to take into consideration when you're approaching markets. It really just the whole process, I think, has definitely changed.

And in many areas I have to say this obviously we work for our clients that want us to put markets in competition with each, other but many times, instead of competition, let's harmonize them in a way, so we get it done. So really that pressure of the markets, we need to be a little bit careful on what the goal and the end game is to that pressure for better terms.

STEVEN MUNDAY: We've seen, Maria, that the EPC contract price is normally the base assessment of what is the reinstatement value for a particular project. That may be a price that was fixed as a turnkey at some time ago when the project was bid. And between the bid the final award and the construction of the project when you get to the end of the project testing commissioning, it is that the appropriate value for the reinstatement versus sometimes multiple years of inflation?

And that's going to come under challenge as well, I think, to make sure that's appropriate. And there may be were original discounts for technology leaders for new projects and new territories and a discounts by contractors and OEM providers to recognize a first move, which wouldn't be replicated in the event of reinstatement, so I think there's some big challenges there.

SPEAKER 2: So we have discussed projects under construction, but we have to look into the future when these projects get moved over to an operational program. There seems to be a trend now early taken into use, part of the projects being handed over early. And I ask Alan, what are the challenges that you are seeing in this space?

ALAN MCSHANE: I think the challenge is around the phased handover is when the assets are handed over into operations, you've then got operating and construction assets in the same locale, and a lot of these assets can be distributed as well as concentrated in one particular area. So then you've got the concern that you've got construction activities in and around operational assets.

But this is nothing new. This is something that we've used. That's been happening over the years. I mean, not in maybe in the renewable space, but certainly in the oil and gas and petrochemical space. There's been many megaprojects that have gone for many billions of dollars in terms of project value have adopted this approach, and that has been a means of handling that with underwriters to effect that change.

It's more time consuming because it's not just a situation where you'd conduct a performance test and you hand the whole project over in one go. You have a series of smaller project performance tests that will move over specific assets, and each one has to be managed accordingly. And you have to have the right conditions. You have to the right feedstocks, the right inputs, the right outputs in order to allow these projects to be properly tested.

So that is one of the key areas that always is a challenge is making sure you can actually properly performance test assets when you're in this sort of phased handover approach. But as I said, it's something that's been handled for many, many years in other sectors, and that knowledge and experience can be transferred across the renewable space.

SPEAKER 2: To Steven and to Maria, are you seeing the market adopting more of a first-year early operational basis for these risks?

STEVEN MUNDAY: Absolutely, yeah. We see for the early generation taken into use and also the first- year operations, and we've always advocated lifecycle solutions for construction of not first-year operations. Continuity to the greatest extent possible at the same insurers so that whether the insurers consider the asset a construction risk or an operational risk, they've got that relationship during that part of the lifecycle.

And the movement, we are seeing a faster movement of assets taken into use. As I said before, with the opportunities that are available in the market to operate available assets on a merchant basis, maybe before the power purchase agreement is aligned to hand over the project. So that's a high incentivization, but it does come with complexities working with insurers that I'm sure Maria will note.

And in terms of, well, we've got a construction project, is it really an operational project? Is this what we expected write initially? And we have delays in handing over the projects because of the pandemic, and we've seen this a lot recently. Many insurers have found themselves long-term operational risk for taking into use when they're expecting to write a construction project with an increasing risk profile, but not the flattened profile of the final value.

MARIA Sanchis: I agree. Common practice and best practice and seamless of that handover, because like Alan said, you have different provisional acceptance certificates, different-- especially in wind where there's a fine line between testing and operating. But I have found that there's less appetite to actually offer that one year in operation from the construction market.

And actually, sometimes, to get the best deal on the construction phase, you have to work with the markets that are only willing to kind of cover for that particular phase of the project. So there are some challenges, I think, to obtain that. But ideally, again, it's a balance between price and cover.

I think that is quite important in any power project and particularly in renewables to seek that year of operation within the construction period as well and with the same insurers. So there's no fine lines between those phases and even during the maintenance period where many of the defects are [? manufactured ?] throughout that period as well.

STEVEN MUNDAY: I'd absolutely agree with the first reparations, and that's a moving position in the marketplace. We've got more insurers with greater appetite coming into the marketplace, and some of the appetite is more aligned to construction risks than maybe operational risks. And for our clients, sometimes that does create a commercial advantage to have separate programs.

On other risks-- some different technologies that are different locations. Maybe there's relationship with clients, the first operations in that there are some advantages for the handover, for final handover, where it makes sense we try to align that. But the early generation taken into uses is a key area that we're seeing all the time now, and that's, I think, the greatest challenge on the construction insurers where they're seeing a greater need to take over operational risks rather than an occasional turbine that was taken into or short-term early taken to use. It's much longer term.

Frequently, the contractor still has risk of loss. Although the operator will have title, the warranties will not necessarily be available from the OEM and the contractor parties when it's taken into use, and the insurance market do like seeing that in the event of defects to recourse back to the manufacturers.

So you're absolutely right, Maria. In terms of handover, what is COD? We get EPCOD. We get PPA COD, we get CTA finance agreement COD. It's very complicated to actually, for a client particularly to understand where they risk loss transfer to definitively from a construction to an operational asset and then how that is blended with the risk in insurance transfer program.

SPEAKER 2: OK, Thank you very much, everybody. And looking back, what we've discussed, it looks like a very exciting place in space to be in. So I'm going to wrap this up and ask you a question. We've already discussed that our industry is evolving at a faster rate than ever. What does our future look like in this space? What predictions do you have for the future? And I'll start with Steven.

STEVEN MUNDAY: So I think tomorrow's going to look very green, of course, and net zero by 2050. Absolutely. But I think we need to be cognizant of the fact that it's a global energy transition. So tomorrow will change at a pace that clients and industry and everyone can manage and that the insurance market should support that.

I do think that hydrogen will play a major role as its own industry group going forward. And I think we are going to see a lot of offshore wind, floating offshore wind opportunities. We're going to see more transitional technologies that support the energy transition between conventional wind and renewable power generation. I think battery storage has got a major impact and place in the future, subject to availability of the lithium for grid balancing. And we're seeing substantial deployment of battery energy storage, and that's really scaling up at a major rate, which is fantastic.

I do think the future for us will probably level out with European wind technology, as they focus back on getting it right. We've got very large technology at the moment in terms of onshore and offshore. I think the OEMs will focus back on not the next biggest thing, but we'll probably see some of the Asian OEMs looking to develop more prototypical new larger scale wind technology.

And I think if there wasn't a balanced position frequently mandated by governments and policymakers, we'd probably see more solar than anything else because it is so readily available and cheap. And with batteries as a storage mechanism, we can see some major changes and gigawatts of deployment of solar.

So I think the future definitely for me would be green. It's a technology space. That technology is going to develop very rapidly. We will have challenges. As Alan has mentioned, what is the technology readiness, and how do we balance that with the insurance market's acceptance of new risks with new technology? Will it be the 8,000 equivalent trouble-free operating hours that we decide with our markets that constitutes not prototypical, not novel but proven technology? But I think the space of the future, we will see with engineers and a greater understanding of the technology performance, the 8,000 hour being less relevant for some of the newer or upscaled renewable technologies. So that would be my initial prediction for the future.

SPEAKER 2: Thank you, Steven. And Maria, your view?

MARIA Sanchis: Yeah, I agree with pretty much everything Steven said, but I see a little bit of a bumpy ride in terms of markets, setting those expectations. Especially when we lived in that soft market when these projects were developed. We're seeing projects really in terms of insurance costs tripled in some cases. So setting those expectations early, it's so important, and having more time. The time element is also very important. But I think, like I said, everybody in the industry, including us, we want these projects to come to a successful end, we just all need to get together and really set those expectations from the outset. I think that that's kind of how I see it because and I also see solar.

And I want to see more battery and hydrogen really take off. We're starting to see that, but really solar, I mean, the price of solar it's also been unbelievable how it's so much more affordable than just five years ago. I'm not even talking even 10. But yeah, I think it's quite exciting.

SPEAKER 2: Thank you, Maria. And Alan, from a engineering perspective, your ideas for the future?

ALAN MCSHANE: Yeah, I think-- well, for the predictions or hopes, I'm still debating that myself. I think we should see some regulatory clarity, which has long been hoped in the space and tell us what governments are going to support and what they're not going to support. So I think that's holding adoption back and hold holding certain projects back. So I'm hoping that will happen, and I think it will happen.

There's definitely, in my view, the push from industry and from the general public for that to happen.

I think there's also another area, I think, needs to be understood. I think there needs to-- the industry needs to decide what's most important to it. I mean, is it is adoption rate, or is it technology flexibility? And I mean not necessarily whether it's hydrogen or batteries or whatever.

I mean, within this subsectors of hydrogen, there's quite a few technologies there for green hydrogen. There's a few technologies in there for battery, and there's quite a few technologies in there for wind as well. And I think if we're going to get the adoption levels that we all wish for and hope for, I think there needs to be a consolidation around a small number of technologies, and I hope that's what happened over the pieces.

Some projects for will win out, and then once we get more clarity around the technologies or consolidation around certain technologies, I think you'll see more rapid adoption. Because I think then the risk landscape will become more predictable, and there by virtue, I think, companies' insurers and projects alike will see a lowering of their risk profiles and greater engagement in that space.

So I think that's what I see it. I think there's a huge potential in this space. There's lots of interesting developments, but I think the industry has to mature out of that sort of development stage into a more implementation stage in the future.

SPEAKER 2: Excellent. Thank you, Alan. The future definitely does look green. So I'd like to thank everybody who contributed to this episode, and it's a pleasure to be working with three such experts. Maria Sanchis?

MARIA Sanchis: Thank you so much. It's been a pleasure. SPEAKER 2: Steven Munday?

STEVEN MUNDAY: Thank you, Mike Thank you, everyone. It's been great to contribute to this podcast. SPEAKER 2: And Alan McShane?

ALAN MCSHANE: All right. Thanks so much, everybody. It's been great to have this discussion.

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