Construction all risks
Because of the wide variety of risks inherent in power plant construction and operation, risk sharing by contractor provisions or by insurance should be carefully evaluated to protect the equity from a failure or interruption of revenue receipts.
Many of the risks associated with power project construction and plant operation are generally assumed by insurance companies. However, the many insurances that are available and required can be confusing and expensive.
Because privately financed project development companies generally rely on the revenue from the sale of electric power of a project, delayed completion or unscheduled outages can jeopardize the project's coverage of current expenses. - including interest payments and loan repayments.
Financial backers, therefore, require that the corresponding finance agreements reached with a project company contain comprehensive obligations covering those risks. Such agreements contain minimum insurance requirements monitored by the banks or other lenders, and often require the services of special consultants.
Normally, the supplier of a turnkey power plant assumes all risk and liability for property damage during the planning and construction phases until the plant is provisionally handed over to the owner/developer.
Insurance for power projects has to encompass many differing priorities: the owner needs the latest technology to give maximum efficiency; the contractor wants the lowest deductibles to give minimal exposure; banks need the widest protection at any price; and, the insurance industry has to comply with government regulations and the project's Power Purchase Agreement. These conflicting demands serve to further complicate the situation.
Other risks existing on the part of the supplier, such as those related to outstanding work for completion of performance and activities governed by warranties are covered by Maintenance insurance linked to the Construction/Erection All Risks (CEAR) insurance.
And, because subcontractors supply certain portions of the project, an insurance policy in the name of all participants is usually required to cover all subcontractors and consultants, as well as personnel and consultants/engineers supplied by the owner/developer.
Power plants are complex and demanding when it comes to insurance coverage. Therefore, the various risks associated with project construction and plant operation must be carefully assessed, and covered by insurance policies to the greatest extent possible and economically feasible. And, because types of project coverage available vary widely, and change with the political and environmental surroundings of the territorial risk, it is necessary to arrange a package of coverage to meet the needs of all parties with interests in the project.
Selection of the correct insurance program is a matter of negotiation. It needs effective and professional advice to ensure that resources are not wasted and that a long-term philosophy of protection is established for the project involving financially sound and experienced insurers and re-insurers.
Clearly, a well-defined insurance concept covering all major insurance-related risks avoids friction among the participating partners helping to ensure the on-time completion of the plant for the benefit of the customer.
Risks in the pre-construction phase include transport of plant components to the construction site from manufacturing facilities, and damage to property, covered by Marine Transit/Delay in Start-Up (MT/DSU) insurance (supplier's risk); manufacturer/set-up of plant components on suppliers' premises, normally covered by existing insurance programs of the individual suppliers/manufacturers; and loss of profit, covered by Marine Consequential Loss (customer's risk).
Construction/Erection All Risks (CEAR) - Wrap-up or owner-controlled insurance needed to ensure the availability, and most complete, coverage for construction. If the CEAR is a restricted coverage, then the scope of the DSU will be equally limited.
Many DSU policies do not meet the initial operations of the project, and only respond after the anticipated performance acceptance. Thus, the widest form of protection under the CEAR will give a double benefit: enhanced material damage coverage, and wider coverage of the DSU exposure.
Force majeure - This unique form of financial loss protection protects the project parties against a number of factors, including:
Outside causes over which the insured have no direct control that may adversely affect the project development, such as:
(direct or indirect physical damage that prevents the performance of the contract (perils in nature, strikes, etc.) - usually conventionally insured under project construction/erection "all risks" policies; and,
(direct or indirect non-physical damage of a nature that can also prevent the performance of the contract (strikes, labour disputes, unanticipated changes in law/legislation, enforcement by order of court, etc.)
Excusable causes granted to project participants for which an extension of time, relief, or excuse under contract might be granted - normally excluded from conventional CEAR policies.
Any other cause beyond the control of all of the parties to the contract (including such things as archaeological finds, adverse soil conditions, losses under subsidiary or side agreements (such as prime tenancy, pre-determined purchase or sales agreements) - normally excluded from conventional CEAR policies.
Force majeure insurance can also be extended to include an element of advance loss of profit or delay in start-up coverage above that covered under a conventional construction "all risks" policy.
Political force majeure - On international power projects, many Western companies and banks seek to mitigate political force majeure risks through insurance. The insurance market, both in the form of commercial insurers and
export credit and investment agencies, creates coverages that can protect investors against risks, such as:
Confiscation, nationalization and expropriation
Physical damage due to war and terrorism
Inability to remit hard currency earnings out of the host country
Forced divestiture (where the investor's own government insists that an asset is divested) and forced abandonment (where the situation in a country deteriorates to such an extent that the asset has to be abandoned)
Abrogation of allied agreements such as power purchase and fuel supply agreements.
Such coverages are applicable both to equity investments and to loan capital, and are widely used by sponsors, investors, and advising banks.
Loss-of-Profit - Based on the corresponding property insurance coverages, policies can be drawn up providing insurance for loss of profit caused by equipment damage during transport - Marine Consequential Loss (MCL) insurance; and during construction and erection - ALOP insurance, or alternatively - DSU insurance.
Construction - Loss of profit coverage during project construction includes insurance for losses due to delayed completion of the plant, resulting from events related to deliveries to the site or to construction activities.
Loss of profit coverage during plant operation is of particular importance to the operator, because the warranty extended by the power plant supplier, covering the construction, commissioning, and warranty periods, is limited to property damage, whereas the risk of loss of profit rests with the customer alone, (except for liquidated damages).
In the event that no revenue can be realized from the sale of the electrical power, such monetary risks can also be covered by insurance. However, it normally requires that corresponding property insurance also cover the property damage resulting in monetary loss. During plant operation, loss of profit is normally covered by Business Interruption (BI) insurance following Property All-Risk (PAR) insurance, including Machine Breakdown (MB) coverage.
The better the property insurance coverage, the better the loss-of-profit insurance
While the market for coverage of material damage is normally large, the need to include DSU, following machine loss coverage, limits the market dramatically. Insurers often apply comparatively large deductibles to the material damage risk when DSU coverage is purchased, as compared with those deductibles available for material damage coverage alone.
Construction/Erection Lenders are closely focused on ensuring the right level of project revenue, the risk exposure to that revenue, and the ability of the sponsor or contractor to adequately perform their obligations and complete the project.
Thus, during the construction/erection phase of a power project, significant risks must be covered, including: storage of plant equipment on the project site and damage to property, with Construction/Erection All Risks (CEAR) insurance (contractor's risk); and loss of property, with Advanced Loss of Profit (ALOP) following CEAR insurance (customer's risk).