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Resource risk is one of the biggest challenges to wind farms in Latin America, but there are insurance mechanisms to hedge against that and avoid lower returns damaging investor confidence, according to renewable energy insurer GCube's head of business development.
BNamericas: GCube published a report in May in which it identified resource risk as the biggest threat to onshore wind farms, but how can developers protect against resource risk?
Jatin Sharma: You can hedge against resource risk, and developers have now woken up to the need to protect themselves. There are insurance mechanisms to cover that, either by paying a premium or trading off and setting performance goals that sacrifice the need to pay a premium. A lot of developers will be scrutinized by investors to ensure they carry out due diligence to hedge against resource risk, as missing revenue guidance due to low wind speeds is something that can be protected against with what we call weather risk transfer (WRT). Blaming wind speeds is seen as poor management. Resource risk has not been looked at until recently.
BNamericas: Are premiums higher in Latin America for insuring renewables projects compared with other markets?
Sharma: Projects tend to be larger in Latin America and the terms and conditions on a project in Mexico or Chile would be different to those in Europe, for example, due to their larger size and because of their location in earthquake and wind storm zones.
BNamericas: Payouts for mechanical failure have dropped over the last couple of years, so is wind a safer industry due to technological innovation, or due to better operation and maintenance (O&A)?
Sharma: In more established markets, developers have come out scarred from earlier projects and are now investing more in their O&M, being more creative with O&M and carrying out more preventive maintenance, such as installing Scada monitoring, and rewarding people with bonuses for performance and imposing penalties for not performing. However, while the overall trend is an improvement, we have seen in remote markets such as parts of Latin America that there is a longer lead-in time and a more limited supply chain, and in the event of mechanical failure or climate damage it can take a long time to get farms back online. The Aura Solar I PV plant in Baja California Sur, for example, was knocked out of action by hurricane Odile in 2014 and was offline for almost two years. But rather than mechanical failure, which tends to take place on projects where the turbines are older, the biggest exposure in Latin America is clients missing power generation targets due to lower wind speeds.
BNamericas: So as well as O&M, due diligence and WRT, diversification of assets and location are also key to a company hitting its revenue targets?
Sharma: Many companies develop regionally, with large portfolios, but in one place, in one state or region of the US, for example, which doesn't spread climate risk. If you get a lull in one particular state, you will hit investor confidence. If a project is relatively small, that is fine for a large company with other assets, but independent power producers are building 200MW projects and all they need is a regional climate variation or prolonged climate change and they could be missing their forecasts by 30%. One of the biggest challenges in Latin America is very large, single projects that can be vulnerable. Resource risk doesn't affect one turbine but an entire site, whereas a gearbox failure just hits one turbine.
About Jatin Sharma
Sharma has worked at GCube for seven years as head of offshore and business development, and is a graduate of Birkbeck College at the University of London, and the London Business School.
About the company
GCube is a renewable energy insurance company with offices in the UK and the US, offering property and liability coverage for utility-scale projects around the world.