Part III of III of Renewable Energy Projects on Contaminated Property | Managing the Risks
In addition to green building coverage, carbon credit risk (i.e., risks associated with cap and trade regimes, including performance failure to achieve the required tax credits) is another climate change-related coverage that has been highly touted of late. Clearly, it is a coverage that may prove invaluable to a renewable energy project insofar as carbon credits and RECs may be the financial drivers of a project. Some carriers have offered separate policies addressing carbon credit risks, e.g., Zurich and Swiss Re. However, like green building coverage, this risk can be best addressed under the commercial property policy. There are two places in the property policy that can address this risk. First is the business income and extra expense section.
This section covers loss of income caused by interruption of operations as the result of physical damage to covered property by an insured peril. The other place is the mechanical breakdown endorsement to the property policy that covers loss due to business interruption caused by technological breakdown. This section essentially substitutes for a separate boiler and machinery policy.
The CGL policy issued by the renewable energy insurer along with the property coverages will not contain environmental coverage because of the total pollution exclusion endorsement normally added to such policies. That endorsement eliminates coverage for products pollution coverage, i.e., for pollution caused by products once they are in the stream of commerce. Some environmental carriers that provide CGL coverage, however, are willing to remove the total pollution exclusion or to provide a separate policy with products pollution coverage. Obviously, such coverage may be very useful for particular projects. However, if that coverage is unavailable, products pollution risks should be addressed by the indemnities and insurance requirements contained in the contracts with product manufacturers.
The CGL policy issued by an energy insurer can have some very useful non-environmental coverages geared towards alternative energy. As noted above, contractual liability coverage is very important to cover indemnification clauses in the myriad of contracts involved in these projects. There should also be a coverage extension for failure to supply power liability in such CGL policies. Finally, if applicable, the underground resources and equipment hazard endorsement (which pays for property damage as a result of well blowouts) could be quite useful for geothermal and carbon sequestration projects. The CGL carrier’s method of rating, or setting premiums, should also be carefully considered. Experienced energy underwriters know how to design simplified rating plans based on kilowatt hours.
RISK MANAGEMENT OF RENEWABLE ENERGY ON BROWNFIELD SITES
A renewable energy facility on a brownfield particularly requires a program combining the property and CGLpolicies issued by an insurer’s energy department with an SPL policy issued by its environmental department. However, the SPL policy must be capable of manuscripting to address known and unknown preexisting conditions as well as the unique combination of risks or perils created by such projects. Consider the following examples of risks presented by the reuse of a brownfield site with an engineering control or cap as a remedial measure:
• Vibrations from technologies such as wind turbines not constructed and/or not operating according to specifications may disturb or crack the cap; or
• Heat and/or dehydration from solar accumulators damage the cap due to the failure of some cooling systems or other problems.
Whenever such damage may occur, a unique mix of potentially insurable risks arises:
• Pollution releases that can be covered by the SPL policy and property policy;
• Remediation risks (“green” remediations, and risks that the remediation will harm solar equipment or vice versa) that may be covered by the SPL and property policy;
• Performance failures—nondelivery of power intended to be generated on the site, technological failure that can reduce energy efficiency, which may be covered by the property, CGL, or SPL policies);
• Carbon credit risks that can be covered under the SPL or property policies (business income and extra expense, and machinery breakdown).
But the greater issue is that these risks do not decline over time, except insofar as pollutants might bioremediate on their own. At the same time, renewable energy projects in themselves often have terms of fifteen or twenty years. Thus, long-term stewardship coverage under an SPL policy as discussed above will be required, but it also needs to be paired with some form of long-term coverage under the CGL and property policies that accompany the SPL policy. A form of such long-term coverage can be achieved if the energy department is willing, for example, to lock in their rates for a period of years. In addition, the renewable SPL policy with IC/EC coverage provides a sort of long-term loss control by requiring that the IC/ECs be continuously monitored and certified on an annual basis. The energy department can equally provide significant loss control under the property policy by requiring and overseeing continuous LEED (Leadership in Energy and Environmental Design) certification and monitoring.
Such a tailored insurance program should be integrated with the various contracts allocating loss exposures in a renewable energy project, particularly the major PPA and lease agreements. Since most of the overlapping and unique combinations of risks discussed above are essentially environmental, they will ordinarily be addressed in the environmental provisions of the lease or
PSA. The insurance program for the renewable energy on brownfields project integrating SPL and property/CGL coverages should therefore be required in an insurance provision within such an environmental section of the those contracts. The typical indemnity and insurance clause of the PPA will also probably need to reference this insurance program.
It is clear that managing the risks involved with renewable energy projects located on contaminated property is no simple task. Certain parameters of such a deal may be fixed, such as financing structure, capital costs, and off-take contracts. However, there are far more uncertainties associated with such transactions, such as regulatory and construction delays, energy output, known and unknown environmental conditions, and pricing and performance risks affecting each project. Performing the first step of the risk management process, risk identification and analysis, requires identifying and analyzing specific environmental as well as energy-related risks of concern at the site. The contracts and insurance policies critical to a brownfield transaction must not only be complementary and consistent with each other, but also must be integrated into key renewable energy project contracts and insurance policies covering alternative energy risks and exposures. Sound risk management requires the creation of a tailored insurance program that combines both environmental and property/casualty coverages. The development of such a program requires consultation with experienced counsel and, perhaps more important, a team of knowledgeable risk managers who can implement the risk transfer mechanisms involved in such a project in an integrated fashion.
For more information contact Christopher D. Hopkins, Esq.
The Law Office of Christopher D. Hopkins, LLC
1812 Front Street
Scotch Plains, NJ 07076