MEMBER NEWS: Proposed OFTO Mutual awarded contract from Innovate UK

January 12, 2023
MEMBER NEWS: Proposed OFTO Mutual awarded contract from Innovate UK

Renewable Risk Advisers Ltd (Renewable Risk), with support from the Offshore Renewable Energy (ORE) Catapult and Prospect Law Ltd, has been awarded a 12-month contract by Innovate UK, the UK’s innovation agency, to structure a legal entity that will improve the ‘insurability’ and ‘bankability’ of UK offshore renewable energy. The project is named ‘The Insurance-Debt Nexus: How risk policy keeps renewable energy bankable’.

This award follows a Feasibility Study also funded by Innovate UK which was recently shared with energy regulator Ofgem and the Energy Networks Association (ENA) OFTO Forum. Letters of support from Ofgem and the Offshore Transmission Owners (OFTOs) were included in the subsequent bid. Subject to satisfactory completion of a finance review by Innovate UK, the new contract will start on 01 February 2023.

The OFTOs are special purpose vehicles (SPVs) established to own and operate the high voltage transmission infrastructure which includes export cables to shore that are by statute ‘unbundled’ by the developer of an offshore wind farm before it becomes operational. These are often highly geared assets, where project finance is crucial to the 6 OFTO owning companies that are responsible for the 23 live assets that surround the UK.

The offshore renewable energy sector is undergoing rapid expansion and by 2030 it is forecast that up to 40,000km of offshore wind farm export cables will be laid worldwide compared with just over 7,500km at the end of 2020. Currently approximately 80% of the value of offshore wind farm claims have come from OFTO cabling losses.

This escalating cost of damages in the offshore wind subsea cable sector has led to a hardening insurance market, resulting in increased premiums, and more stringent terms. This sellers’ market leads in turn to a reduction in ‘bankability’ which reduces ‘investability’ since the equity internal rate of return (IRR) is less leveraged by debt.

The current reliance on the need to prove ‘physical damage’ for the insurance policy to respond means that repair campaigns are often delivered at great expense (i.e. during winter). The ability to intervene at the discretion of a mutual will reduce the cost burden of vessel hire, which alone can amount to 65% of the value of insurance claims, and collective self-insurance will enable electrical fault-finding technologies to enhance preventative maintenance of export cables in offshore wind.

A mutual solution also proposes collective equipment procurement to allow asset managers to stock cost saving equipment such as universal joints that are currently beyond their means. Also information sharing between ordinarily competing organisations will enable the development of risk management best practice that will drive improved asset performance and reduce potential claims.

Only through collective self-insurance can these solutions be delivered. And to do so is in the public interest.

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