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Renewables insurer unfazed by Texas freeze but extreme weather risks set to rise

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An RWE onshore wind farm. While wind was not the main culprit in the Texas power grid outages last month, one insurer forecasts rising climate-related physical risks for renewables in North America.
Source: RWE AG

While utilities brace for a hit in the tens or even hundreds of millions of dollars from February's brutal cold spell and subsequent disruption in Texas, one renewable energy insurer with nearly 10 GW of wind assets under coverage in the state is not expecting a surge in claims.

GCube Underwriting Ltd. has received three claims in relation to the Arctic blast so far, although more are expected, CEO Fraser McLachlan said March 4. "Because there is such a massive amount of assets in Texas, it takes an awfully long time to go around to inspect all the turbines," McLachlan said in an interview. This is often done using drones or having technicians go up the tower, and information will be trickling in over the next few weeks.

A number of turbines were forced offline by ice, but McLachlan said most will have resumed operation again once conditions returned to normal, without requiring repairs.

GCube also insures against lost revenue associated with outages, but McLachlan does not expect this to account for a significant amount of claims, either. Most green power developers in Texas send electricity to the grid when produced but do not have strict commitments, the CEO said. February, when the outages happened, is also a low wind season in Texas.

The main cost burden expensive spot price purchases could be more difficult to shift and the market is still in the process of calculating the bills and allocating responsibilities. German developer RWE AG has already warned the market of a loss to the tune of hundreds of millions.

GCube does not cover spot price risks such as the $9,000/MWh peak prices RWE had to pay to honor supply commitments. The utility took a bigger hit from the event than other Europeans in Texas such as Ørsted A/S or EDP Renováveis SA. Analysts at Jefferies noted that RWE may seek to recoup trading losses from insurance, though RWE declined to comment, saying on March 9 only that all of its assets had returned to service.

If claims in Texas do increase significantly, insurance premium levels could rise, McLachlan said, adding that rates have been increasing recently anyway. For now, "We don't think there is necessarily a need to penalize people for what happened in Texas," he said.

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System change is coming

There are ways to avoid turbine outages, with all major Western turbine-makers offering cold-weather technology such as rotor heating to prevent the build-up of ice. These add-ons are common in the northern U.S., but not in Texas. Cold weather technology adds about 4% to the cost of a turbine and only amortizes when freezing conditions last more than two months each year, according to German turbine-maker Nordex SE.

"Not a massive amount of [wind] energy was lost, given the variability of wind resources. It really wasn't shock horror," Gareth Brown, CEO and co-founder of renewables software company Clir Renewables, pointed out. Equipment performance can be improved by optimizing the way the turbine is run, and cold weather technology, which is only used every few years, may even fail to deliver when needed, Brown said.

With the latest freeze fresh in regulators' minds, there could be mandatory weatherization of the grid and generation fleet in Texas something Gov. Greg Abbott has already called for. For wind assets in the state, these upgrades are unlikely to amortize and instead may simply be baked into the cost of doing business there.

But beyond that, system change within the Electric Reliability Council Of Texas Inc. will come, too, and financing of projects will be looked at differently, said George Humphrey, a Houston-based partner at law firm Thompson & Knight LLP specializing on energy projects. "There will be much closer scrutiny of generating units being financed," Humphrey said.

Funders, including tax equity financiers, will also have less appetite for merchant risk. "There will be more security around physical delivery requirements, capping merchant exposure so you don't have projects getting blown up," he said.

Humphrey also pointed out that there were both winners and losers in the disruption. "Anybody that was able to generate during this time will have done really well," he said. The attractiveness of the Texan wind market will not have suffered, with the market's fundamentals still strong, he added.

"The good thing is what's happened here is really fixable. It's not rocket science — the market just has to put in some good regulation," Clir's Brown said.

Extreme weather events more frequent

While the Texas freeze is still deemed a once-in-a-generation event, McLachlan of GCube sees evidence of an emerging new normal. "If you look at U.S. as a whole, it is a part of the world where we're seeing more and more extreme weather events: tornados, ice storms, a lot of anomalies in the weather patterns," he said.

Extreme weather and natural catastrophes have led to $300 million in claims by the industry since 2015, and claims due to extreme weather have increased 50% each year since a trend GCube expects to continue.

Events like heavy rain and wildfires have also become more frequent, more severe and less predictable. This, combined with a lack of historical data, makes it more difficult to model impacts on renewables and insurance requirements, GCube said in a March 9 report.

The frequency and severity of losses due to weather has increased substantially in North America since 2010 while the rest of the world has stayed fairly consistent.

Global warming and El Niño weather patterns are partly to blame. "However, the lack of preparation for [natural catastrophes] and extreme weather by contractors and subcontractors forced, due to stiff competition, to build projects 'to a price' will not have helped," GCube said.

Solar projects are most frequently damaged by wildfire, windstorms and tornados: These perils made up 80% of claims in the past 10 years. Hail, while rare, causes disproportionate damage to solar assets, and was responsible for 60% of total losses by financial severity since 2010.