OPINION: Chinese WTGs - first of all, separate the technical from the political
By BIN WANG - Chief Underwriting Officer
Everywhere you turn today, it seems that people are asking offshore renewables underwriters about the insurability of Chinese Wind Turbine Generators (WTGs).
On the one hand, major developers are making serious inquiries regarding Chinese WTGs, unable to resist the allure of their tremendous potential cost savings on CAPEX.
One German offshore wind project in the North Sea has already publicly announced the selection of MingYang’s 18.5MW machines after “extensive due diligence”.
‘A little overwhelming’
On the other hand, there are voices that appear to be very much against the idea of Chinese WTGs penetrating the European market, regardless of whether any Foreign Direct Investment (FDI) is made to build factories in Europe, enabling the WTGs to be “Made in Europe”.
In such an environment, it can all be a little overwhelming for project planners to make these decisions, given today’s maelstrom of political and economic uncertainties.
Initially, it is important to separate the technical considerations from the political ones – the latter of which few (if any) parties in industry can do anything about, so we’ll leave that to the politicians. From a purely technical perspective, NIORD’s general view is that, so long as WTGs meet standard criteria such as type certification from parties such as DNV, there should not be any objective industry-related reasons to consider Chinese WTGs to be materially riskier so as to justify specific underwriting adjustments in terms and conditions. We simply do not have the relevant historical loss data.
‘Additional underwriting scrutiny’
Now, this isn’t to say there aren’t nuances to all this. First, is it that the data simply does not exist? Or might it be that such data does exist domestically within China but that linguistic, cultural and less-than-transparent barriers are in place which prevent it from reaching Western industry and being digested by international markets? And, if the issue of transparency or non-transparency is controllable by the Chinese manufacturers themselves, should there exist a presumption that there may well be, in fact, something worth hiding? Further, regardless of manufacturer, all WTG sizes breaking new ground (such as any manufacturer going to 18.5MW, for example) would likely receive additional underwriting scrutiny and, perhaps, certain abridged coverages at more robust pricing.
Given the serial defect histories of certain WTG models across the major Western WTG manufacturers, the underwriting concerns appear to be more related to anyone breaking new technological barriers and WTG sizes and not necessarily who is breaking them.
Other potential underwriting and claims handling impacts related to Chinese WTGs, should they ever be used in European offshore windfarm developments, can also include:
Are there heightened cyber security concerns? If so, should standard offshore renewables underwriters consider treating offshore windfarms using Chinese WTGs with heightened or altered cyber/terror/sabotage/war exclusions, leaving the entirety of this political risk with other specialized expert markets? Today, particularly, the line between war and terror, and how the term “sabotage” can be used in relation to situations within this topic, has become blurred. It is possible that concerns relating to Chinese WTGs can further complicate the situation.
If and when Chinese WTGs gain a place within the European market, it is not unlikely that they may be subject to regulatorily imposed taxes, tariffs, import duties and the like. This may pose an additional Sum Insured consideration for underwriters, and material claims inflation risk. Further, regarding sourcing of repairs, spare parts or components directly from manufacturers in China to save claims costs - will that be permissible? There are issues which seem to increasingly impact insurers: regulatory and trade barriers which ultimately have the potential to drive claims costs inflation.
How will Chinese WTG manufacturers seek to provide and service their warranty and Operations and Maintenance (O&M) obligations? Should they find it cost efficient to have Chinese Wind Turbine Installation Vessels (WTIVs) with Chinese crews providing these services in European waters, would this be permitted by European regulators? If not, what does this imply for claims costs and wait times for repairs? Overall, if regulatory barriers might exist for both parts and components for Chinese WTGs – and for availability of O&M resources to service and repair Chinese WTGs – what does or should this imply in respect of the underwriting of offshore windfarms utilizing Chinese WTGs, not merely from a physical damage perspective but, more crucially, a Delay in Start-Up (DSU) and/or Business Interruption (BI) perspective?
‘Too great to ignore’
These are thorny questions and hypotheticals which unfortunately do not have any clear answers. Regardless, for developers looking for cost efficiencies in this business, the potential of Chinese WTGs is too great to ignore. Increasingly, it seems that “all options are on the table”. The potential implications of this for insurers remains to be seen.
One thing is for sure: claims costs aren’t getting any lower, and it seems that these difficult issues may serve as one more factor which may further exacerbate claims inflation in the industry.
