China’s Offshore Wind Insurance: A Shorter Stave of the Barrel

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Last week French President Emmanuel Macron visited China and left with a bunch of deals total worth of $15bn, including energy cooperation. The frequent visits of Macron always end with some energy contract results–nothing surprising. But this time the “superstars” are a gas deal between GDF and Beijing Gas, as well as the reprocessing plant, for nuclear spent fuel, that the two countries have been negotiating for more than a decade.

However, I cannot help but notice there is no news about EDF’s deal with China Energy Investment Corp (CEIC) over the Dongtai IV offshore wind project. While the two companies signed an initial agreement in March this year, they have apparently not yet reach a final commercial agreement.

As we discussed in our piece last week about the challenges/risk concerns facing the foreign developer in the Chinese offshore wind market, the slow progress of EDF-CEIC’s final deal in Dongtai IV could be related to some of these risk factors. Typical questions in my mind would be: what would be EDF’s right (influence/scope) as a minority shareholder in a project owned by CEIC? How could they ensure their way of risk management to be executed in the project?

Following last week’s discussion, today we are diving into one of the major risk factors–insurance.

Offshore Wind Insurance in China: Status Quo

Chinese offshore wind companies had begun to explore insurance options since 2008, when the first-of-its-kind project Donghai Bridge took off construction work.

By now, several state-owned insurance firms have stepped in the market and offered offshore wind insurance, including People’s Insurance Co China (PICC), China Pacific Insurance Co. (CPIC), and China Pingan.

Currently, the types of insurance the Chinese insurance companies offer to offshore wind developers include:

  • All Risks Insurance for offshore wind construction & installation: (WINDCAR) 0.5-0.7% rate
  • Transportation Insurance: 0.15-0.5%
  • All Risks Insurance for Property: 0.15%-0.02%
  • Equipment Damage Risk Insurance: 0.3%-0.5%
  • Liability Insurance
  • Ship Insurances

As the capital intensive and of high-risk nature of offshore wind projects—similar to nuclear and IGCC, the insurers need to transfer part of the risk by facultative insurance (a form of reinsurance). There are already a few international reinsurance firms active in the Chinese energy market, including Swiss Re, Munich RE, RSA, Codan, Axa, and Allianz.

Swiss RE, for instance, has participated in the Chinese wind industry for long. Together with CGC, WWF, and others, It has contributed to China’s research and development of an offshore wind insurance and risk management system. It also introduced its offshore wind code of conduct to China in 2015.

According to CGC, Swiss RE has been the “principle reinsurer for Pinghai Bay II, Yangjiang Shapa project and ten other offshore wind projects facing typhoons and other risks.” 

However, another review investigation research pointed out that the amount of Chinese offshore wind projects under international reinsurer’s support is “less than half of the existing projects.”

Lagging Insurance System

Chinese offshore wind market has yet to develop a mature insurance system.

The key bottlenecks/reasons for the lagging in insurance development include:

  • Higher risk nature of the technology and supply chain: one of the risk concerns is on the domestic offshore wind turbines. Firstly, there is a (small) amount of turbines that have been developed upon modification from their onshore siblings, of which the offshore risks could be higher; Secondly, performance of most turbines remains to be seen in the longer run operation, especially under extreme weather condition; Thirdly, the OEMs are under pressure to quickly move to large or double-digit machines, but any rush in R&D may bring uncertainty
  • The lagging verification system: China has developed “type certification” for just a few years based on the input of international players (e.g., DNV GL), but the market has yet to adopt “project certification,” which is a standard practice in Europe. The lack of project certification—an overall review on the turbine, tower, and foundation designs—mean many projects are running in high-risk
  • Less-developed risk management mentality and experience generally seen in the market: so far, most Chinese players focused on expanding the market size, with limited insights on improving risk management via insurance products. Developers mostly look to pressure for longer warranty from turbine OEMs (from 2 years initially to 3-5 years now) and, thus, transfer part of the (asset) risks to OEMs, instead of prioritizing the financial measures
  • On insurer’s side—the lack of insight and assessment capacity of the risks: Chinese offshore wind just took off from 2017, with only 4.45 installed by the end of last year. There is little to none understanding or data of the long-term offshore wind farm performance. What’s more, China looks set to put up 40GW in the next 2-5 years. The explosive development in a short period means the insurers would only have a small window to grow their knowledge on the sector, which will be hard.   

[READ MORE on Chinese Offshore Wind Boom and Risks to Compete with Nuclear ]

Insurance products designed for offshore wind projects are, thus, limited; insurance cost (asking prices) among different insurers could vary a great deal. As a result, project developers and investors potentially face a high-cost burden from insurance and are still vulnerable to risks.  INSERT PIC-2

The incident of Liaohe 1 vessel, an offshore wind installation broken and sunk during construction work in Jiangsu waters 2016

Limited Reinsurance for Offshore Wind

As a common practice in high-risk infrastructure projects, reinsurance is an effective way for insurers to transfer part of their business risk by covering these projects. But so far, reinsurance progresses very slowly on Chinese offshore wind market, meaning that domestic insurers are subject to major risks themselves.

The lack of reinsurance capacity is not because there is no interest though. Quite the opposition, the international reinsurance firms like Swiss Re, Munich Re, and Willis looking into the significant potential in this booming market. And “the international reinsurers have a collective reinsurance capacity of $2Bn,” according to a report written by an employee of China Three Gorges’ insurance branch business.

However, the reinsurance products are limited and the terms that foreign reinsurance firms ask for appear to be “difficult.” “Foreign reinsurers offer only DS (Delay Start-up) and BI (Business Interruption ) insurance under WINCAR/WINDOP (wind project construction or operation) conditions; they also require very high deductibles, ” the same report said.

Asking price from international reinsurers is estimated to take up 1% of the total project construction cost. This could be a heavy financial burden. To compare, that ratio in onshore wind projects is about 1/10.

Moreover, the emerging market’s “different” practices are also blocking reinsurance’s involvement in offshore wind. The reinsurers also face—like many international companies in China— language barrier and information barriers to evaluate project risks. Challenges unique in Chinese offshore projects—e.g., typhoon— is another factor behind the strict reinsurance terms…

[READ More on Foreign Developers’ Activities in Chinese offshore wind and their hesitation]

Among various “different” market practices, the lack of Marine Warranty Survey (MWS) is the most direct factor behind the lack of progress of reinsurance.

While it is a common practice for international reinsurance companies to provide facultative insurance based on reports of the MWS, Chinese power developers are highly unfamiliar with the methods of MWS and used to consider that as an extra cost.

Due to this bottleneck, “less than half of Chinese offshore wind projects are supported by international reinsurance,” a top executive of Willis revealed in this interview.

Lacking reinsurance backup suggests looming risk issues facing the industry. Domestic insurers—often controlled and owned by the government—are carrying the financial risk.

Luckily, Chinese companies have become aware of the insurance bottleneck, and more developers like SPIC have taken initiatives to incorporate MWS and other measures to improve reinsurance development.

In a May meeting this year, SPIC specifically discussed MWS with several international insurers. [READ MORE on SPIC and other Chinese power utilities and understand their different drives]

Meanwhile, China General Certification (CGC) also announced recently to develop project certification services to gear up the market’s risk management.

Things are moving to add to the shortest stave in the barrel.