Marsh: Offshore Wind Farms Bring New Challenges, Opportunities to Insurance Industry

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The federal approval of the first wind farm to be built on water in the United States marks a new era for renewable energy projects, said Peter Mavraganis, who was recently appointed leader of Marsh's U.S. renewable energy practice.

"It's a great new area for all of us, carriers and brokers," Mavraganis said.

U.S. Interior Secretary Ken Salazar's approval of Cape Wind, the first wind farm to be built on water in the U.S., brings new opportunities and challenges for insurers and brokers, Mavraganis said, noting that additional off-shore wind projects are likely to follow. And they will all need insurance.

"These are very complex, very expensive projects," Mavraganis said. "It multiplies the difficulty when you are constructing roughly 20 miles off shore versus on shore. The logistics of the construction itself become more difficult."

For instance, the project would need skilled personnel, special vessels and equipment.

"One wind tower that has a 3.2 megawatt turbine could be as tall as 500 feet. It's quite a structure," he said. He estimated the cost to build a 350 megawatt wind farm might run between $1.5 billion to $2 billion.

Much of the assembly would likely take place on shore, and then specialized vessels would be used to ferry the equipment out to concrete pilings that have been built in 70 to 120 feet of water.

Workers' compensation can become a tricky issue, as three different sets of regulations can come into play, Mavraganis said.

On shore, workers would be subject to standard workers' comp laws, which are regulated by each state. Some workers would likely be covered under the federal Longshore and Harbor Workers' Compensation Act, which would cover workers who work both on shore and on ships. The federal Jones Act, which covers ship workers, could also come into play.

Other key insurance coverages would include:

-- Builders' all-risk coverage, a property insurance common on construction projects, would protect against property damage as the project was being built. It could cost an estimated 2.5% of the construction value.

-- Delay in start-up coverage, which would protect the developer if a claim prevented a project from starting on time. This would cost an estimated 2% to 3% of the expected revenue that the project would generate. This insurance would likely be replaced by business interruption once the project was completed.

-- Third-party liability, which would cost about 0.075% to 0.09% of the construction value.

Environmental coverage would also be important, but it's not possible to estimate the cost, Mavraganis said. "It depends on the location of the facility, where the cables come on-shore and how far it has to go to reach the substation," he said.

Such a project would likely also require marine cargo coverage, which would cover the transportation of equipment, and contractors pollution liability.

Mavraganis said while new to the United States, off-shore wind farms have been common in Europe for the past 20 years.

"There are underwriters who are used to and skilled at underwriting these types of risks. We have to import that skill set here so our U.S. underwriters become more comfortable and more knowledgeable about how to underwrite these risks," Mavraganis said. "But you can underwrite them. They've been underwriting them for 20 years, and we think they'll be successful here in getting these projects up and running, probably in the next couple of years."

Energy Management Inc., a Massachusetts-based energy company, is the developer of Cape Wind, a proposed "wind park" that would include 130 wind turbines in Nantucket Sound. The project is expected to take 18 months to complete, and generate up to 420 megawatts of energy once it's up and running. The project, which received federal approval in April, is subject to several court challenges.

To hear the full interview with Peter Mavraganis, visit: http://www.ambest.com/media/media.asp?RC=181262

(By Meg Green, senior associate editor, BestWeek: [email protected])