Business Interruption Insurance for Power Plants€¦ · Business Interruption Insurance for Power...

23.09.2020

Stefan Feldhütter, BI Consultant, Claims 1.6.2C2 - Confidential

Business Interruption Insurance forPower Plantsthe elephant in the room….

Agenda

1. BI Coverage Overview Objective of Insurance Insured Perils Insured Loss

2. Fundamental Definitions BI Sum Insured Calculation of Indemnification BI PML Assessment

3. Specific Aspects of BI Insurance for Power Plants Power Purchase Agreements Power Generation with Renewable Energies

23.09.2020 2Business Interruption Insurance for Power Plants

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BI Coverage OverviewOverview matters – not only for ostrichs 1

any BI insurance indemnifies for a Loss of Gross Profit, that is caused by a reduction in turnover caused by

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Coverage overviewPurpose of a BI policy

an interruption of an operational business (operational BI)

a delay of a project leading to delayed commencement of generation of turnover (Delay in Start Up (DSU), ‘Project BI’)

any BI cover should ensure the ‘money generation capability’ of an investment protect the liquidity of the business

the BI indemnification substitutes the Gross Profit lost due to the BI, the PD section protects the assets

Insured perils: usually like under the PD sectionBusiness Interruption Insurance for Power Plants

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(Variable Costs)

Net Profit Standing Charges Specified Working Expenses

Gross Profit

(Fixed Costs)

fixed taxes, property taxinsurance cost

fixed charges for electricity, heating or gasdebt service (bank requirements)

wages and salaries……..

sales taxeselectricity, gas, phoneprocess licensesfreight and packing…….

Turnover

greyzone

Coverage overviewDetermination of the Insured Interest

Business Interruption Insurance for Power Plants

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Fundamental Definitionsdeserve our highest attention 2

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(Variable Costs)


Gross Profit

(Fixed Costs)

Turnover

Basically two options for calculating the Gross Profit:• deduct variable costs from turnover• add net profit and standing chargesshould lead to same result

Fundamental DefinitionsDetermination of the Sum Insured under BI


Turnoverless

Variable Costs

Net Profitplus

Standing Charges

Gross Profit

Difference Method:forgotten var. costs lead to exaggerated SIbut: ‘safe side’

Addition Method:forgotten standing charges lead to insufficient SI=> potentially underinsurance

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Fundamental DefinitionsDetermination of the Sum Insured under BI


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identical fixed costs

strong seasonal effects in turnover and thus net profit

increased likelihood of PD loss in periods of high capacity utilisation

higher BI exposure compared with power plant

even stronger impact forcampaign businesses (foodindustry: sugar, vegetables, ...)

Two businesses – both with the same Gross Profit!

Fundamental DefinitionsDetermination of the BI Sum Insured: seasonality


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Gross Profit

Turnover

Fundamental DefinitionsDifferent Options for Scope of BI coverage

cap repayment and interests on debts

Not neccessarily the full Gross Profit is insured under BI but only parts of it as to the Insureds‘ need and money for premium available

Insurance of Specified Standing Charges only


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Turnover

Gross Profit

Specified Working Expenses

(Variable Costs)

Net Profit Specified Working Expenses

Gross Profit

Nonet profit!

indemnification of the lost gross profit on the (as if) basis:'…had no loss / delay occured …'

no guarantee for Net Profit of the business under BI

… a change of economic situation: decrease of product price, production volume unchanged

(Fixed Costs)

Standing ChargesStanding Charges

Turnover

Fundamental DefinitionsIndemnification based on Actual Loss Sustained (‘ALS’)


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Standing Charges

Turnover

Gross Profit


(Variable Costs)

Standing Charges

… further drastical price decrease

(Fixed Costs)

Turnover


Net Loss Gross Profit

indemnification of the lost gross profit only as, far as it had beenearned by the turnover -> alignment of interest

again:indemnification of the lost gross profit on the 'as if' basis:'…had no loss / BI occured …'

Fundamental DefinitionsIndemnification based on Actual Loss Sustained (‘ALS’)


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Besides a forecast of the monetary values BI risk assessment and underwriting require and estimation ofthe worst case duration of a BI

PD-, BI Policy Period

Interruption

Removal of DebrisReview of Design *

Replan*Re-Supply

Re-Erection & Re-Testing

SafetyMargin

t

Maximum Indemnity Period

(Indemnity Period Limit)

* generallyexcluded

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Fundamental DefinitionsDetermination of the Indemnity Period Limit IPL

Such assessment isexecuted for the most severeBI scenarios

IPL/MIP restricts theInsurers‘ exposure under a BI policy timewise

Gross Earnings wordingsusually do not apply an IPL/MIP => no restriction in time, just in monetary amount


Practical approach:

if • the IPL was assessed in a realistic manner and• there is a bottleneck equipment

simplified calculation:

PMLBI = Annual Sum InsuredBI *

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Fundamental DefinitionsPML assessment

IPL – Time Deductible

12

*1*1

*1 in months


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Specific Aspects ofBI Insurance for Power Plantskeep one eye on the technolgy, the other one on thebusiness 3

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Generation of power / electricity comes with a very wide range of different technologies

These technologies have quite different basic characteristics Base load capability Seasonal fluctuation of primary energies (RE) Contribution of fuel costs to production costs ….

These differences lead to quite different business models, that need to beaddressed in BI insurance

Specific Aspects of BI Insurance for Power PlantsVariety of Power Generation Technologies

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(Variable Costs)


Gross Profit

(Fixed Costs)



wages and salaries……..

sales taxeselectricity, gas, phoneprocess licensesfreight and packing…….

Turnover

greyzone

Specific Aspects of BI Insurance for Power PlantsCost and Turnover Components in Power Plants

Power Generation – a typical monoliner

electricity

heat *1

*1 cogeneration


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(Variable Costs)


Gross Profit

(Fixed Costs)



wages and salariesdepreciation

……..

sales taxeselectricity, gas, phoneprocess licensesfreight and packinggrid utilization costs…….

Turnover

greyzone

Specific Aspects of BI Insurance for Power PlantsCost and Turnover Components in Power Plants

Typical Costs for Power Generation

electricity

heat *1

*1 cogeneration


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Mechanism and rationale of Take or Pay Cost Agreements

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Gas SupplierA

GT Power Plant Bgas

EUR

electricity

Gas Purchase Agreement

defining:• quantity of supply• quality of supply• price per Nm³ or MWh• min. reinbursement for not taking

off gas (Take-or-Pay Agreement)

+ certainty offutureincome, evenif PP fails totake off gas

+ certainty offuture supply and fuel costs

⇒during a BI fuel costs should not fully be considered variable costs, at least ToP costs are quasi standing charges and should be treated as such in calculating the BI Sum Insured to avoidunderinsurance

⇒surplus gas can be sold potentially -> potential earnings -> response of the policy-wording to that?

EUR

ElectricityConsumer C

Specific Aspects of BI Insurance for Power PlantsTake or Pay Costs


2023.09.2020

Key Elements and Mechanism of Power Purchase Agreements (PPAs)

Electricity GridOperatorPower Plant B electricity

EUR

Power Purchase Agreement

Defining supply:• max. power (MW)• expected quantity (MWh)• Power quality• price for MW and MWh

+ price for max. supplycovers investmentcosts (capex)

+ price forconsumption coversgeneration/fuel costs(opex)

+ certainty of futuresupply and costs

electricity

EUR

ElectricityConsumer

+ certainty of futuresupply and price

+ increased reliabilityand quality ofelectricity supplied toend consumer

Additional price components(penalties) e.g. for capacity availability grid services

+ increasedrelaibility and qualityof electricity supply

- increased downwardpotential in case of BI

⇒DSU and BI should consider all relevant price components -> ‚back to back‘ coverage to PPA

Retail PPA

Specific Aspects of BI Insurance for Power Plants Power Purchase Agreements


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Insurance of Specified Standing Charges only

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Example: Insured owns a multitude of power

plants with sufficient spare capacity of older PP, that run at part load only

Insured can still produce every MW demanded with slightly higher production costs/MWh (lower efficiency of older PPs)

Lenders nevertheless stipulated Insurance for their interests (cap repayment, interest payment) for not yet paid off PP

cap repaymentX X

Specific Aspects of BI Insurance for Power PlantsCoverage forms


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seasonal business, e.g. Windfarm in RSA

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identical fixed costs

strong seasonal effects in production, turnover and thus Gross Profit

increased likelihood of PD loss in periods of high capacity load?

higher BI exposure compared to coal fired power plant

concept of preagreed GP values for individual months or weeks to ease claims handling


Windfarm, GP 100mio ZAR p.a.

Coal fire base load PP, GP 100mio ZAR p.a.


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Gross Revenues coverage

23.09.2020


Coverage often demanded by industries / businesses with little variable costs-> Gross Profit is close to Turnover / Gross Revenues-> Indemnification based on the lost Turnover / Gross Revenues (or a high percentage thereof) easesclaims handling

application in:

Renewable Energy generation (no costsfor fuel -> low variable operational costs)

but: inherent tendency to over indemnification seasonality in most RE projects


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Gross Revenues coverage - pitfall

23.09.2020


Net Profit Fixed costs Variable costs -> fuel

Gross Profit

Gross Revenues

gap

Net Profit Fixed costs Var.costs

Gross Profit

Gross Revenues

gap

A typical RE project: no fuel costs => low variable

costs Gross Profit ~ 90% of Revenues

An older fossil power plant: Investment fully written off

=> low fixed costs high fuel costs => high variable

costs Gross Profit ~ 50% of Revenues significant over indemnification


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Wind Energy Yield Cover (WEYC)

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Perspective of a typical Investor in a Wind Farm Project

?windfarm

Key interest of the investor is the monetaryperformance/output of the project

WEYC allows for externalization of

wind risks availability and technical

performance/efficiency of the windpark

WYC does not cover electricity price risks!


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For BI insurance of Power Plants

23.09.2020

analyse and understand the underlying technology, business modeland PPA

be aware, how the Gross Profit / potential daily BI loss develops over time-> the Sum Insured under BI only provides an overall limit-> the Sum Insured under BI might be exhausted faster than expexted

=> such risks require higher BI rates for decreasing Turnovers it should be checked, whether Gross Profits still

would have be earned by the Turnover (Actual Loss Sustained) probably address seasonal effects in the wording to ease BI claims handling

(i.e. define monthly preagreed GP values) for PML estimation consider seasonal fluctuations for IPL > 12 months

(e.g. 18 months IPL might cover 2 full seasons and ASIs)

Specific Aspects of BI Insurance for Power PlantsWrap Up


Thank you for your attention!…and now: friendly discussion with a Rhino

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Business Interruption Insurance for Power Plants€¦ · Business Interruption Insurance for Power...

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