Extended Warranty, Availability, Power

Guarantee, Design defect: How to Develop and Price

the Alternative Energy Opportunities

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Alternative Energy Development

n  Introduction n  Types of alternative energy – What do you think

falls under this classification? n  What types of insurance products and services

are needed?

Alternative Energy Development

Who are the Interested Parties in energy project development?

What are the interests of each of these groups? 1.  Technology owners and developers 2.  Investors and commercial lenders 3.  Power Purchasers 4.  Insurers

Alternative Energy Development

Developers/Technology owners

1.  A new technology that works so far on small scale and seek to commercialize

2.  Need investors and lenders 3.  Need to guarantee that it will work on large scale 4.  Take advantage of governmental incentives, grants,

loan guarantees 5.  Need economic sustainability for stream of income

Alternative Energy Development

Investors/Commercial Lenders

1.  Need reasonable return 2.  Look for tax credits 3.  Want to reduce risk as much as possible

1. Credit risk 2.  Project completion risk 3. Operational risk 4.  Performance risk

Alternative Energy Development

Power Purchasers

1.  Government entity/private sector 2.  Power purchase agreement (PPA) put in place 3.  Usually need some guarantees of performance 4.  Need reliable source of power to satisfy

demand for power

Alternative Energy Development

Insurers

New product: n  Mechanical breakdown/Extended warranty

n  Design/Serial defect n  Power curve guarantee

n  Equipment availability guarantee

Alternative Energy Development

Insurance Product Development 1. Generally a manuscript policy with project or

technology owners. 2. Often written though non-admitted company 3. May have broker, or may be direct.

Alternative Energy Development

Mechanical Breakdown/Extended Warranty (EW) Covers any mechanical breakdown after the

expiration of the manufacturer warranty (MW) on the individual components of the energy-producing device.

Alternative Energy Development

Extended Warranty Conditions

1. Typically MW +EW = 5 years 2. Maintenance program required for energy site 3. Claims administration process 4. Self-insured retention or per occurrence deductible 5. On-going performance improvement plan 6. Availability of detailed data on energy production and device performance

Alternative Energy Development

Design/Serial Defect Coverage

The technology owners have brought the project to a point where it needs to be scaled up. This brings the risk that the design of the power-generating device may not hold up in the large scale or over time. The facilities are expected to generate power for 20-30 years.

Alternative Energy Development

Design/Serial Defect Coverage

1.  Definition Where there is a repeated failure of the same component or repeated failure from the same cause in a predetermined percentage of the commissioned equipment

Alternative Energy Development

Design/Serial Defect Coverage Conditions

1.  Concise definition of occurrence 2.  Continuous monitoring 3.  Continuous Improvement Plan in place 4.  Deductible/SIR in place

Alternative Energy Development

Power Curve Guarantee

The Power Purchasers will build in a guaranteed level of power production in the PPA.

The Power Curve is derived from multiple factors that affect the production of power based on the capacity of the equipment installed.

Coverage can be provided to the technology or project owners to transfer a portion of that risk to the insurer.

Alternative Energy Development

Power Curve Guarantee Conditions

1.  Required level of energy output, usually stated as percentage of power curve

2.  Availability of power source taken into account 3.  Multiyear guarantee required 4.  Required maintenance performed 5.  Performance parameters and thresholds agreed and

measurable

Alternative Energy Development

Equipment Availability Guarantee

The source of power generation must be naturally sustainable. However, the equipment must be available when the power source is available. A lapse in availability could lead to a breach of the PPA.

Alternative Energy Development

Equipment Availability Guarantee Conditions

1.  Accepted availability parameters in contract 2.  Measurement of availability in place 3.  Maintenance program in place and monitored

Alternative Energy Development

Extended Warranty Pricing

1. Need a list of components for power-generating machinery 2. Need annual frequency of failure for each component – ideally a

prototype of the machine has been/is being tested 3. Need cost of repairing/replacing components 4. Need manufacturer’s warranty on components 5. Factor in any deductibles 6. Now develop pure premium for term required

Alternative Energy Development

Design/Serial Defect Pricing 1.  Determine chance of one components not being fit for their

intended purpose 2.  May need to model as there may not be any long-term historical

data 3.  Determine the definition of occurrence 4.  Determine cost of serial defect of same component - factor in

any deductible/SIR 5.  Repeat calculation for each component – determine which

components are not covered 6.  Determine pure premium for all covered components

Alternative Energy Development

Power Curve Guarantee Pricing

1.  Need to have power curve for technology – describes the expected power output at various conditions

2.  Need to know the experimental power output of prototype 3.  Need to know coverage parameters – what level of power

output is required for each period 4.  Determine frequency of various levels of output 5.  Cost of power per percent of output is a given 6.  Determine pure premium

Alternative Energy Development

Equipment Availability Guarantee Pricing

1. Review frequencies of failure of components 2. Need actual downtime of prototype during available periods of

active power generation 3. Determine probability of various levels of downtime for various

future periods – may need to model 4. Cost of power per percentage of downtime is given 5. Determine pure premium