With the increasing adoption of renewable energy, a number of factors such as changes in technology, supply chains, financial incentives and environmental considerations present significant challenges for stakeholders when assessing current reinstatement costs.
In this article, we dive into the issues relevant to five major renewable energy resources to understand how to overcome these challenges.
Replacement Cost Of Hydroelectric Power
Due to the complex nature of renewable energy assets and the fact that there is often significant external interest initially (e.g. from local residents’ lobby groups) there is usually a material investment in upfront impact assessments and other preliminary studies. This is particularly true of Hydro power plants. Depending upon the nature of these start up items, their cost may not be repeated in the event of reinstatement of an identical facility at the same location. Such costs should therefore be excluded as uninsurable in valuations for insurance purposes.
Similarly, there can be unrepeatable environmental impact study or compliance costs, design or management cost elements in the original contract prices. These prices can be removed when considering reinstatement costs of such assets.
However, environmental regulations concerning the impact of hydro facilities have tightened over the years and, if compared to original costs there could be an increase in compliance costs if reinstated today, even to the same specifications, pushing up overall replacement costs of hydroelectric assets.
Replacement Cost of Wind Power Assets
Wind turbine sizes have steadily increased, as technology has improved and as wind farms have been developed in more remote onshore and offshore locations. In practice this has meant that the cost per kW has fallen overall and many owners now expect reinstatement costs to have reduced.
Costs per kW have been heavily influenced by the increased capacity of wind turbines, resulting in fewer turbines required for the same site output capacity, but these considerations can be tempered by partial loss considerations.
This cost per kW reduction may not always be applicable to current facilities. Local planning or typographical restrictions may make replacement by different turbines impractical or illegal. Therefore, owners may be forced to replace turbines with similar sized and more costly models.
Owners also need to be conscious of the higher risk of partial loss scenarios rather than looking at the facility overall.
Reinstatement Cost of Solar Power Plants
Solar PV panels prices appear to have bottomed out in recent quarters but depending upon when the facility was constructed the panels current price could be materially lower to the costs incurred during original construction.
As well as becoming cheaper, PV panels have also become more efficient meaning that for the same overall output a facility could have considerably less panels, reducing supporting structure costs and associated infrastructure expenses.
Depending upon the configuration, panel mounting brackets and supports have a bearing on reinstatement costs. In some cases, supports can be replaced with lighter or redesigned modern alternatives that can lower the numbers required, so reducing overall reinstatement costs.
Rebuild Cost Of Geothermal Energy Assets
On the one hand, geothermal technology has improved, and turbine efficiency has significantly improved since the earliest geothermal plants were developed. This means that the capital cost per kW for similar facilities has fallen over the years and many owners of older plants now expect reinstatement costs to have reduced.
On the other hand, environmental regulations concerning the operation of geothermal facilities have tightened over the years and existing plants may need considerably more water treatment, monitoring or safety equipment if reinstated today, pushing up replacement costs.
Rebuild Cost Of Biomass Facilities
There has been a significant increase in activity in the biomass energy sector in recent years, with numerous new projects and initiatives being approved across the globe. These developments have been on both a regional and local level. This is partly due to the increased efficiency of biomass energy generators and a slight lowering in implementation costs.
Higher biomass fuel cost, and unconventional biomass fuel usage, is forcing owners to use more efficient multi-fuel boilers, turbines and peripherals. This is having the effect of reducing the capital cost per kW.
Again, however, owners need to be conscious of the risk of partial loss scenarios as well as looking at the facility overall if there are multiple units at the same location.
Finally, some of the government sponsored financial incentives for biomass installations have been withdrawn or reduced more recently and this is likely to mean that reinstatement costs could differ materially from original costs.
Conclusion
Some of the challenges mentioned above may be addressed through creative approaches during policy renewals. If a facility of 50 existing wind turbines producing 150MW in total could be replaced today by 20 larger turbines producing the same output, the maximum loss for owner and insurer is reduced whereas the most likely foreseeable loss (a single turbine) remains the same.
An assessment by a professional valuation firm can help you understand and navigate through these scenarios, helping you ensure adequate and appropriate coverage.
The chart below demonstrates how costs for renewable energy changed between 2010 and 2017, in some cases such as PV solar quite drastically. While solar and wind show marked reductions, the increased complexity and regulation in Hydro, Geothermal and Biomass means that some of these technologies have increased in cost.
