28 November 2023
Defying Limits: Conquering Construction Challenges in Energy Projects
Effective construction is crucial in expanding energy security and accommodating growing global energy demands. Whether it’s building substations or erecting wind turbines the construction phase of an energy project includes complex risks with differing requirements dependent on the particular technology being built. Geopolitical challenges, adverse weather conditions, and resource constraints can all lead to substantial cost implications and project delays.
Global Instability: Challenges and Implications for Developers
Localised conflicts often have impacts far beyond their own territory; in construction this can result in developers facing significant equipment procurement and transportation issues. Currently, if developers require their equipment and materials to sail through Russian waters, for example, they risk their cargo being stuck in neighbouring ports until further notice. When heavy fighting shut down one of Europe’s biggest iron and steel works, Azovstal, in 2022, it knocked out 40% of Ukraine’s entire steel output, impacting the construction of multiple energy projects.
The construction and energy industries are under threat as uncertainties surrounding future geopolitical changes raise concerns. If elected in November 2024, Trump has promised to institute a 10% tariff on almost all imports. If other countries retaliate by imposing tariffs on US goods, the economic upheaval and disruption could place even further pressure on the industry. His previous tariff war left developers vulnerable to unforeseen tax bills when importing materials.
Supply chain issues for the sector are numerous and fuelled by the volatile price of raw materials and energy resource, which are predicted to be the primary causes of disputes in the global energy sector over the next five years.
In a recent poll, 57% of senior leaders in the wind industry listed the supply chain as one of the biggest challenges organisations face in the next three years.
While the power generation supply chain has improved in regard to cost and supply of raw materials, the limited quantity of transformers has become the new bottleneck, with an estimated minimum lead time of more than a year for transformers of most sizes. Currently, the global transformer market faces shortages and price increases due to increased demand for raw materials, pandemic-related shortages and backlogs, labour constraints, shipping issues, and geopolitical tensions.
Contractor failure and labour shortages have also plagued the sector. The small core of specialist contractors is now in high demand and can be difficult to secure, impacting delivery of projects as manufacturers become short-staffed or contractors do not have specialist teams available to carry out installations. Consequently, contract negotiations must cover the risk of price fluctuations and potential delays.
In a recent poll, 57% of senior leaders in the wind industry listed the supply chain as one of the biggest challenges organisations face in the next three years.
Construction Complexities in Renewable Energy
There’s no escaping the fact that the bulk of renewable energy technology is still ‘new’, and new means ‘untested’ in the eyes of insurers. Construction projects reliant on new technology that has yet to be deployed commercially can face unforeseen delays when things go wrong. When prototype developments are scaled up to commercial levels of production, they can run into difficulties as plants are operated for the first time in a 24/7 operation and face the variabilities of fuel, weather and equipment for the first time in a commercially controlled environment.
In addition, large-scale renewable energy projects are often located in remote and challenging environments that require specialised management. Remote locations mean limited accessibility, harsh climates and difficult terrain. Resources such as fuel, water and electricity can be scarce here, therefore it is essential to plan for the availability and efficient use of them. A solar PV farm located in a desert environment is dependent on water for its efficient operation, often requiring construction of desalination plants before work can begin on the Solar PV farm itself. Equally, on-shore wind farms are often placed in mountainous areas to benefit from windy conditions, making it difficult to transport equipment and materials to the site.
Developers should be aware of contractual force majeure provisions as extreme weather events become more common and should have clarity on the consequences of time extensions and cost allocation. By leveraging insurance solutions, renewable energy projects can effectively manage risks, ensure performance, comply with regulations, and secure financing, ultimately contributing to the successful implementation of renewable energy initiatives.
Insurers main concerns revolve around weather conditions or defects affecting multiple units. Freezing temperatures used to be the pervading weather risk for construction, but now anything from extreme heat and giant hailstones have the potential to derail a project. According to research conducted in 2021, adverse weather delays 45% of construction projects worldwide.
Breaking Through Offshore Barriers
In the marine environment, there is an evolutionary race to develop the winning advanced new technologies and specialised logistical solutions required to address the extreme challenges of this harsh environment including salt water corrosion, accelerated fatigue, lateral motion, dynamic rotation, cyclic stress, marine organism growth, high waves and currents and many others. Pushing the boundaries in design and deployment is vital for material and installation costs to be brought under control to deliver projects with acceptable profit margins.
With offshore wind farms moving to increasingly deeper waters where wind speed is typically higher and more consistent and planning to operate with some of the largest turbines seen anywhere in the industry, the adaptation of foundation designs to meet these requirements is under extreme pressure to deliver on durability, scalable production and deployment, plus of course controlled cost contributing to an ever reducing Levelised Cost of Energy (LCOE) to meet global strike price offers from target host nations.
Insurers with appetite to participate in this exciting new sector are rightly concerned regarding the risk exposure created by working with floating and dynamic subsea cable technologies and they have strict criteria resulting from their concerns and experience to-date regarding the cover they believe can be offered in each case to deliver a balance of attractive offers to project developers whilst retaining the potential for profitable results for their own business.
Souce: Statista
Developers and their technical advisors are paying special attention to the thoroughness of design validation and certification for main project components as well as the execution methodology in addition to the usual site specific meteorology, marine environment and geotechnical investigations, loads, layout, energy yields and construction methodology to be used. In all of these areas a key aspect of successful risk transfer is selection of highly competent and experienced OEMs and contractor(s) of all types in all aspects of the project delivery.
Subsea high voltage power cables are another integral part of the increased pace of the energy transition, with a multitude of new cross-border Interconnector projects planned, or in development to support an ever more integrated and balanced region wide electricity market as part of the shift from nationally focused hydrocarbon production and export or use. Yet many have been delayed for years due to the difficulties in acquiring adequate international demand and market management conditions, local planning consents, grid connection certainty, and technically reliable and cost effective cable supplies to name but some of the challenges.
As with all of the technologies requiring massive research, development and production investment such as wind turbines for offshore use, floating foundations, high performance transformers and converters high voltage dynamic cables and others; supplies are concentrated among comparatively few companies, and with the manufacturing time lines many future year delivery slots are already full, causing an ever more concerning rise in costs or delay in delivery of such vital projects.
Protection needs to be a priority
Alongside standard Contractors All Risks policies, developers working on complex energy projects must consider risk management in design, environmental and pollution factors, public exposure, and potential weather and natural disaster conditions.
Having appropriate insurance coverage is essential in assuring stakeholders that the developer is adequately prepared to handle potential risks and fulfil their obligations. This, in turn, fosters positive relationships and contributes to the overall success of the project.
At Gallagher, we have tried and tested approaches to assist our clients in understanding their risk exposures and their risk-transfer options and tailoring insurance solutions to them to extract maximum value from the (re)insurance market.
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