In episode 7 of Energy Renewed, Katie Janik of ICF speaks with Chris Pollack of the ICF technical advisory team, Sandy Calvert from insurance advisor Moore-McNeil, and Eric Daniels, founder and owner of Sun Cycle, to discuss how to get renewable energy projects back online after an unforeseen event. This episode is the third of three in our series; it focuses on the technical aspects of rebuilding and repairing a project that was impacted by unforeseen events.
Full transcript below:
Katie Janik: Welcome to Energy Renewed, a podcast by ICF. A meeting of the minds and renewable energy where people come together to discuss ideas and strategies to propel the industry forward. I'm Katie Janik from ICF and the host of Energy Renewed. ICF provides technical advisory services to lenders, investors, and project owners for renewable energy technologies and processes. In this podcast series, we will consider varying viewpoints ranging from policy topics to equipment components.
In this episode, we are discussing unforeseen events and what to do to get a project back online after an unforeseen event occurs. Throughout my career as an asset manager and consultant, I've seen all sorts of events derail a project either during construction or operations. Fire, wind, floods, and even pirates holding equipment for ransom. And each time the event occurs, there seems to be confusion around how to work through the insurance process and the resulting restructuring or rebuilding of a project.
I always say people don't pay attention to asset management until something blows up or burns down. I say that figuratively, but on this topic, and in this episode, it is literal. I find unforeseen events a unique challenge because of that related restructuring and rebuild, and because it requires diligence, a process, and documents, and thinking outside the box to bring a project back online.
To help inform us on considerations of what to do after an event occurs, and during the process of rebuilding a project, we have Chris Pollock from the ICF technical advisory team, Sandy Calvert from the insurance advisor Moore-McNeil, and Eric Daniels from Suncycle USA, a company that handles remediation. ICF developed a three-part series to explore unforeseen events.
This is part three focusing on the technical aspects. Part two focused on insurance pricing and trends, and part one was the discussion on the commercial considerations of rebuilding and repairing the project.
Hi, everyone. Let's take a minute for you to introduce yourselves and explain your expertise on this topic.
Sandy Calvert: Hi. I'm Sandy Calvert. I'm the senior vice president at Moore-McNeil since 2014. Moore-McNeil, along with our sister company, Stance, provides insurance consulting services to banks and investors for non-recourse project finance transactions.
Eric Daniels: Hi. I'm Eric Daniels. I'm the CEO of Suncycle USA. We are a sister company of Suncycle GmbH out of Germany. Suncycle GmbH was founded in 2007 when I was serving as the CTO for BP Solar, and around that time, we began a very substantial, so to speak, investigation of field performance and outages across our fleet.
Chris Pollock: Hi, everyone. My name is Chris Pollock. I work with Katie and ICS technical advisory group. I've been in the energy industry for over a decade. I've worked in engineering design development and construction roles. I'm currently working in the consulting field and within technical advisory. And primarily I've worked on the generation side of the energy industry, and very interested and happy to be talking about this topic with you all today. So thank you very much.
Technical aspects of insurance policies
Katie Janik: Well, thank you for being here. In parts one and two episodes, unforeseen events, we discussed the commercial side and insurance trends. And today, we're diving into the technical aspects of the insurance policies and the steps to take to develop a plan for rebuilding the project. So Sandy, let's start with you. Will you walk us through what insurers are looking for under the insurance policy as it relates to damage of the site?
Sandy Calvert: Sure, well, and insurers just trying to get to the bottom of a particular claim after you've reported the claim. They want to understand what the cause of the loss is to understand whether or not the loss is insured under the policy. Once they determined that they have an insurable loss, then they're all about the damage. How big is the loss, and how to quantify the loss, so that they can reserve it on their balance sheet.
Chris Pollock: Thanks, Sandy. And yeah, I feel like from the project owner's perspective as well. It's probably a little bit nerve-wracking at first if your energy project is subject to an unforeseen event that causes damage and takes a portion of it offline. And then I feel like from the project owner's perspective, after some of the steps that were taken and that we discussed in the previous podcast, really the job becomes determining what has been impacted from the event and this may vary based on the type of event, whether it is a natural disaster, whether it was something that stemmed from an equipment failure. And it also may depend on the exact type of technology that your project is using and whether that's something like PV, or solar, or thermal project using conventional generating technologies.
How to identify damage after an unforeseen event
So I'm curious, Eric, as to your thoughts in terms of some of the methods you've used historically to identify and be able to figure out what has happened after one of these events have occurred.
Eric Daniels: Sure. Thanks, Chris. We tend to look at the world through defects and failures at these project sites, and the defects may stem from factory manufacturing conditions or have been introduced to a system component through its life in the field. And so we generally look at when we were called to investigate a site performance question or a damage assessment.
Things like storms fires and theft are pretty easy to see. Usually storm damage or hail as an example leaves behind a pretty clear path of visual destruction, broken glass, and the like, but there's often unseen damage that occurs at these sites and it may not necessarily lead to immediate power loss. It's something that can happen over three to five years or even longer.
And we now add another aspect to a system of unforeseen events that result from the general aging of the fleet that's out there. Municipality for instance, may struggle in year 12 to find the budget to replace key components in year 12 that were in the original forecasted model for the site, but may not necessarily, at that time, have the money to make that repair. The repair goes on chat and it leads to a catastrophic failure.
And so we use various techniques that include infrared electroluminescence imaging, which is a lot like an X-ray of the panel. We do a lot of accelerated lifetime testing, various forensic tests that help us evaluate the health and remaining life of critical polymers. Polymers are used like insulation on wires, polymers or plastics on the back sheets of modules, all serving to electrically protect people from contacting the electrical components, but also serve to insulate the system properly to avoid faults.
And so we have a lot of different techniques that we use that can help not only discern the defect and it's probable failure mode and impact on performance, but we can often begin to tell when it occurred in the life of the system.
What’s applicable under insurance policies for energy projects?
Chris Pollock: There's a couple of interesting points there, Eric, I wanted to sort of, maybe take some of them and ask Sandy what her thoughts are regarding the when you said invisible damage and also damage that may not manifest or results in sort of performance degradation immediately.
I'm curious, Sandy, are these type of things that you can't really see with the naked eye or that may not result in a performance hit like today, but maybe have reduced the lifespan of equipment or may or may not result in equipment failure three to five or more years from now. Are those type of things applicable under insurance policies for energy projects?
Sandy Calvert: They may be, but it depends on your expert's opinion. A couple of things involved in the analysis of that might be where these things manufacture or transportation defects. If so, then those things are not covered by the policy, and the loss resulting from those are covered by the policy. So there will be someone who's trying to discern the difference between the two or that can't be done.
As for future loss, that's difficult in somewhat of a gray area. Because the insurer wants to pay you for the loss that has occurred not the loss that may occur. Now, there may be a difference in opinion and there may be an expert that a times that the loss has occurred you just haven't necessarily experienced the degradation. There's likely going to be an opinion on both sides of the aisle on that particular point, and again it likely comes down to a negotiated result.
Chris Pollock: Interesting. So in other words, the insurer will have technical advisors that they will engage directly with, and the project owner on their side will have their own technical advisors. And for some of these less-clear-cut issues, in the end it may sort of revolve around-- there may be no consensus between those technical advisors. And towards the end of the claim, it'll have to be negotiated in terms of some monetary settlement or something similar to that?
Sandy Calvert: Yeah, I would agree with that.
Katie Janik: But just to emphasize the point, the onus is on the owner to provide the information to the insurer on which to quantify the information on the longevity of the equipment, correct?
Sandy Calvert: Sure. No insurers are going to show up to your project with a bunch of money and hand it over just because you say so. It's going to be something that your expert has an opinion about as well as potentially evidence of a particular loss and how it occurred and why that falls underneath the terms and conditions of the policy that insurers should pay.
Chris Pollock: And on that point, the gathering of the evidence, Sandy, is that something that regardless of if the investigation yields evidence of damage is the investigation into damage itself is that something that project owners can be reimbursed for under their projects insurance policy?
Sandy Calvert: Sure. It depends on the kinds of coverages they procured. Often big, large insurance property policies include sublimity for professional expense. It will be sublimated, so it may not be for the full policy, maybe a level of $2 and 1/2 to $5 million on very large projects. But allows you to go out and engage an expert or many experts to help prop up the loss.
Insurance issues specific to solar projects
Eric Daniels: And within solar plants, Chris, we're often seeing now an ability to apply tools that are common to other industries to diagnose the likely loss of longevity in the products through advanced polymer testing. There are lots of different methods for looking at the dielectric resistance of these plants in order to avoid loss of power, but also perhaps more significant for safety issues, ground faults.
These things all have very high-voltage circuits, and the polymers that insulate those electrical circuits have to remain in place for a very long time, exposed to UV as well as the general environmental conditions. And fortunately, we can turn to tools that are common to other industries to begin assessing the remaining life of a power plant now.
Chris Pollack: And that's really kind of an interesting point about PV or solar in general in that if you look at PV compared to other technologies, particularly at a large scale, if you have a thermal project with a combustion turbine or a steam turbine, you have, basically, two main large pieces of equipment that are capable of generating hundreds of megawatts, whereas at a solar facility in particular, each individual panel is a very, very tiny portion of the project's output. So you have projects with hundreds or thousands, tens of thousands, or even hundreds of thousands of these individual pieces of equipment.
So I think in terms of the investigation process and the evidence-gathering process into these events, particularly for solar, it can be a very, very large undertaking because there's just so many individual pieces of equipment that may be subject to, of course, replacement if that damage can be demonstrated.
Eric Daniels: That's an excellent point, Chris. Often, when we are working at a site, there's initial concern that the testing and investigation will be expensive. We often turn to statistical methods or ISO standards for sampling a site. We don't need to inspect every component on the site, though there are many of them. But we can find a cost-effective way to inspect and test a small sample set, and through that, derive a good forecast for what the condition is of the overall plant and its likely loss of power and loss of longevity at a good cost.
Chris Pollack: Yep. And of course, if your statistical investigation turns out high certainty one way or another, I think that's straightforward. But I think if you have a sample set that doesn't yield a very concrete result, I think there's a potential there to have to continue to test further and perhaps even test on an individual basis if the results are not very clear-cut. So that's actually a very interesting point as well and a sort of good way to be able to try to quickly rule things out.
Eric Daniels: Yes, we recommend often periodic asset surveys with the intent to continue to monitor the health of an asset before it becomes a catastrophic event. As I mentioned earlier, we have municipalities that struggle sometimes with budgets or maintenance is deferred, a larger event occurs, and from our inspections of a site, we pretty much can create a menu of things that have to be corrected due to potential for catastrophic failure or risk to safety—things that an owner should consider because it's a significant event looming on the horizon. And then the dessert menu, if you will, that are the things to consider over time as budgets allow but aren't critical to safety or significant loss of performance.
Chris Pollack: And when the claim is sort of heading towards its conclusion, particularly about this issue—this gray area that we were discussing with Sandy earlier—about how you may or may not be able to demonstrate, and the insurer is not going to pay for damage that may happen, and then it's typically settled.
Reopening closed claims?
So if the claim is closed—and this is a question for Sandy—if the claim is closed, and several years after the fact, some of these issues, maybe systemic issues, start to manifest, does the project owner have the ability to reopen a claim on the same issue that might have happened years ago? Or are they forbidden for doing that, maybe as a condition of closing out the original claim or the settlement associated with it?
Sandy Calvert: So I'd say that depends. I would always recommend that you attempt to close out all potential issues and current issues with the claim that you have in front of you. It's very difficult, I think, to come back at a later date with information and try to reopen a claim up. Oftentimes, there are things that have happened between the first claim and the attempt at the second claim that may have nothing at all to do with the claim that can also be used as evidence that it's not necessarily related to a second claim. So it's always my advice to try to conclude your first claim with as much information and as much evidence as you possibly can to essentially close out the claim.
Eric Daniels: Though sometimes we recommend, Chris, that the owner, when we're trying to find a means to cover a site for potential future losses that, in the settlement, there's consideration of an increased allowance for maintenance over a specific period of time in anticipation of higher maintenance costs. And usually, that's led to a good outcome, and the owner is covered. The insurers are OK with the outcome as well.
Sandy Calvert: Which means, I think, it's just even more important to make sure you have the right team in place so that you can evidence damage, you can do the correct diagnostic testing, so that you get it right the first time.
Katie Janik: I think that's right.
Who pays for evidence collection?
Chris Pollack: And in terms of the evidence collection, Sandy, would the insurer be, quote unquote, "bankrolling" that evidence collection? In other words, will they be compensating the project owner to go ahead and collect that evidence as they're collecting it? Or is that something the project owner sometimes has to do at risk, particularly if the insurer comes to the position at some point that the damage that the owner is claiming isn't either significant or isn't there? Is that something you've seen before with these claims?
Sandy Calvert: Well, that depends on the coverage that you purchase. There are supplements within the policies called professional expenses, which they are supplemented, generally. So let's say you have a project that's worth $200 million. You may have some supplemented professional expense coverage up to, say, $2.5–$5 million, which allows you to go out and engage experts to prepare your opinion or to essentially gather evidence. So yes, if you purchase that coverage, if you have that supplement in your policy, that's covered by the policy.
Katie Janik: And just to note right there, though, that it's not necessarily an automatic approval. So I think that the insurance proceeds that reimburse the owners of projects for the diligence that has to occur after an unforeseen event—there's a process for approval of those funds to be released to the project owners. But then also, if there are lenders involved, then the lenders are also involved in that approval process.
Sandy Calvert: So that's right. You really want to take the insurer's adjuster as a partner in the process of the claims. That doesn't necessarily mean you invite them to all your meetings. You may have strategy meetings that don't involve the insurer. But you do want them to be involved at every step along the way to understand and essentially get their agreement that the avenue that you are pursuing—the particular claim—so that you can get advances along the way.
When you do that, the claim goes or flows much smoother. So if it's a large enough claim, what you would want to do is start with an overall plan and a team of experts that will help you or assist you in developing your claim. And on that team, really, is the insurer's adjuster so that there's free-flowing communication and formal communication.
Summing it up
Katie Janik: So what we've outlined today is the technical aspects in terms of the first steps to build a remediation plan, how to engage the right team, and then also the diagnostic testing involved in order to determine and quantify the damage to the site, and then also to involve the insurance adjuster and the insurers into the process for rebuilding. Well, we did not get into a lot of the details that I think involved this topic. I think we could talk about this for probably a few more hours. Thank you so much for being here today. I think we really have provided our listeners with the first steps from a technical perspective on what to do and what to achieve after an unforeseen event occurs. Thank you so much for being here.
Eric Daniels: Thank you, Katie.
Chris Pollack: Thank you.