NEW RISKS, NEW REACTIONS:
POWER & ENERGY INSURANCE
IN 2019 AND BEYOND
May 16, 2019
NEW RISKS, NEW REACTIONS:
POWER & ENERGY INSURANCE
IN 2019 AND BEYOND
May 16, 2019
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Advisory Committee
Power Conference Inc (PowerCon) delivers interactive
educational and analytical content regarding the associated
risks for the onshore energy, petrochemical and power
industries to a diverse audience of risk managers, insurance
carriers, brokers, and third party service providers who
specialize in these areas of risk.
Advisory Committee
Thank you to our advisory committee…
Marc Giovannetti
Head of First Party Claims, LSM-US
John Roberts
VP Property Claims, Energy & Engineered Risks, AIG
Jose Mogartoff
Global Energy Claims – The Americas, Zurich
Dan McLeod
Claims Director, LSM-US
Steve Guggenheim
AVP, Executive General Adjuster, Zurich
Marc Haller
SVP, Product Line Manager – US Energy, LIU USA
Kevin Knoer
MBA, ARM, VP – Senior Property Underwriter, SCOR
Bob Edel
VP, US Power Generation Segment Leader, Zurich
Gary Ladman
Vice President, AEGIS
Advisory Committee
Independent Adjusting Firm Partners
Legal Partners
Engineering Partners
Accounting Partners
Featured Sponsor
The following presentation is for
educational purposes only and is
not intended for any other use.
It does not represent the view of
any firm, insurer, or reinsurer.
New Risks, New Reactions: Power & Energy Insurance in 2019 and Beyond
❖ Keynote – Disruptive Energy Futures
❖ Insurance Industry Perspective
❖ Energy Transformation
❖ Offshore Wind
❖ US Capacity Markets
❖ Engaging Younger Talent
❖ Capstone
KEY NOTE - DISRUPTIVE ENERGY FUTURES
DISRUPTIVE ENERGY FUTURES
Amory Lovins
Rocky Mountain Institute
INSURANCE INDUSTRY PERSPECTIVE
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
Moderator: Marc Giovannetti
VP, Head of First Party Claims, LSM-US
Jatin Sharma
President, GCube Insurance Services
Jim Podesva
Vice President & Senior EGA, York SLA
As renewable energy assets mature, and become incorporated into
the portfolios of traditional power generation companies what new
issues and risks do you see emerging?
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
What issues do you see in the adjustment of energy losses based
upon the intersection of both of older aged assets and new
technology sitting side by side?
How can this make the technical assessment and valuation of energy
assets more complicated?
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
Renewable energy insurance portfolios have seen deteriorating loss
ratio’s while undergoing dynamic growth. Why has this occurred?
What changes need to take place in the insurance market for
insurance to become a more economically sustainable product?
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
As energy companies become more specialized and transition to the
adoption of newer technologies what challenges can this pose in
dealing with OEM’s and Suppliers when losses arise?
How can the proprietary nature of newer technology frustrate the
adjustment process?
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
Today more renewable assets are being bought up by private equity
and venture capital firms. When asset portfolio’s such as these are
presented to be underwritten, has this caused challenges for you in
analyzing the underlying risks?
What role and responsibility do you feel brokers provide in ensuring
that there is full transparency around the disclosure of insured assets
in an insurance portfolio?
DISRUPTIVE ENERGY FUTURES –
INSURANCE PERSPECTIVE
Coffee Break
ENERGY TRANSFORMATION
Introductions: Bruce Kaliner
Mound Cotton Wollan & Greengrass, LLP
Prajit Ghosh
Global Head of Energy Transition Research,
Wood Mackenzie, a Verisk Business
Yayoi Sekine
Energy Storage Analyst, Bloomberg NEF
ENERGY TRANSFORMATION
© 2019 Verisk Analytics, Inc. All rights reserved. 35
The Energy Transition Story: Power Markets of Tomorrow
CONFIDENTIAL AND PROPRIETARY - DO NOT
DISTRIBUTE OR SHARE
© 2019 Verisk Analytics, Inc. All rights reserved. 36
Your presenter
Prajit Ghosh Global SME, Energy Transitions
The Energy Transition story: Power Markets of tomorrow
Energy Transformation - Battery Storage
Yayoi Sekine
CONFIDENTIAL AND PROPRIETARY -
DO NOT DISTRIBUTE OR SHARE
Coverage.
Clean energy
Advanced transport
Commodities
Digital industry
Bloomberg NEF (BNEF) is a leading provider of
primary research on clean energy, advanced
transport, digital industry, innovative materials, and
commodities.
BNEF’s global team leverages the world’s most
sophisticated data sets to create clear
perspectives and in-depth forecasts that frame the
financial, economic and policy implications of
industry-transforming trends and technologies.
BNEF research and analysis is accessible via web
and mobile platforms, as well as on the Bloomberg
Terminal.
Client enquiries:
Bloomberg Terminal: press <Help> key twice
Email: [email protected]
Learn more:
about.bnef.com | @BloombergNEF
Thank you!
Yayoi Sekine
NEW RISKS, NEW REACTIONS
POWER & ENERGY INSURANCE
May 16, 2019
Lunch
NEW RISKS, NEW REACTIONS
POWER & ENERGY INSURANCE
May 16, 2019
OFFSHORE WIND –
PAST, PRESENT, FUTURE
OFFSHORE WIND – PAST, PRESENT, FUTURE
Moderator: Marc Haller
SVP, Product Line Manager – US Energy, Liberty
Specialty Markets
Liz Peterson (thought leader)
Practice Leader - Energy & Complex Property, Envista Forensics
Bill Wall
Project Director, LS Cable America
Matt Yau
Director, Lloyd Warwick
POWERCON New York City May 2019
Offshore WindBill Wall, LS Cable America
Offshore Wind – Industry Review
➢ First Offshore Wind Farm Vindeby 1991 5MW pilot off Denmark
➢ Europe installed 3148MW during 2017 taking installed total to ~16GW capacity
➢ China aiming for 30GW installed by 2030
➢ Taiwan has 75 OSW projects planned
➢ Global installed capacity of 100GW expected by 2030
➢ The OSW industry represents Billions in industry capex for deployment & investment
Offshore Wind – Current US Status
➢ Block Island Transmission System (BITS) to Mainland by National Grid
➢ First (& only) Offshore Wind Farm in the US - 30MW pilot off Block Island
➢ Deepwater Wind (now Orsted) began development in 2007, installed 2016
Offshore Wind – Current US Status
➢ BOEM Lease Areas – WEA
➢ $1M to $230M!
➢ NY, NJ, MA have current RFP’s forOSW Energy
➢ NJ – 3500MW, NY 2400MW (9GW) MA 1600MW
➢ Orsted, EDF, Shell, Equinor, EDPR, PSEG, Eversource, Avangrid, CIP
➢ Vineyard Wind, Boardwalk Wind, Empire Wind, Atlantic Shores
Ocean Wind, Mayflower Wind,
Bay State Wind, Revolution Wind
Offshore Wind Basics
1. Foundation
2. Wind Turbine Generator (WTG)
3. Nacelle
4. Inter-Turbine Submarine Cables
5. Offshore Sub-Station & Export Submarine Cable
6. On-Shore Grid Connection
Offshore Wind – Key Components/Technology
➢ Turbines, 3MW, 5MW, 6MW, 8MW……
➢ Foundations – Jacket, Mono-pile, floating
➢ Submarine Cable – 3/C, single, AC, HVDC
Offshore Wind – Key Components/Technology
➢ Offshore Substations….
➢ Vessels – Survey, Piling, Cable, Turbine….
Jones Act?????
Submarine Cable Technology & Installation
TYPICAL SUBMARINE CABLE TYPES OR CONFIGURATIONS
AC DESIGNS
HVDC DESIGNS
Submarine Cable Technology & InstallationDESK TOP STUDY
-Proposed Route -Fishing Activities-Route Position List -Restricted areas-Cartography -Permits required-Bathymetry -Existing utilities-Geology -Cable Protection Survey-Oceanography -Site Visits-Meteorology -Survey Analysis-Archeology -Crossing Agreements
Submarine Cable Technology & Installation
Submarine Cable Technology & Installation
Geophysical & Geotechnical Marine Route SurveyBathymetrySide Scan SonarSub-Bottom ProfilerMagnetometerBurial Assessment SurveyThermal Resistivity Archeological SurveyGeotechnical BoringsFinalize Cable Length Met-Ocean Data
Marine Route Survey
Submarine Cable Technology & Installation
HDD (Horizontal Directional Drilling) configurations at the Landings are usually preferred by regulators
Typical conduit profile
Submarine Cable Technology & Installation
Jones Act?????
11,000 Tons
Submarine Cable Technology & Installation
• Submarine Cable Installation Methodology: Jet Plow Technology for Cable Burial
• Simultaneous Lay & Burial
• Post Lay Burial by ROV
Operations & Maintenance (O&M)
Logistics, logistics, Logistics……..
New York PowerCon: Offshore WindA Loss Adjusters Perspective
Matthew Yau
16 May 2019
LWI Team..
• Independent renewable energy loss adjusters
• Team in London consists of 30 adjusters, engineers & forensic accountants (8 specialized in renewables)
• Handled >200 offshore wind claims totaling >USD400m (across Europe)
• Adjusted claims on >30 Offshore Wind Construction projects & >15 Operational Wind projects
• >12GW of offshore wind experience
Capex Breakdown
• 504MW Offshore wind Farm
• Water depth 20 - 32m
• Estimated Contract Value USD 2.5bn
Unit/s Item/s Cost Cost p/unit Capex
USD (million) USD (million) %
140 Turbines 1,342 10 54
144 Foundations 467 3 19
280 Inter array cables 120 1 5
3 Export Cables 163 55 6
2 Offshore Transformer Platforms 191 96 8
1 Onshore Substation 92 92 4
1 Project Management 106 106 4
Key Coverage
What’s covered?
• Physical damage to project assets• Revenue Loss due to resultant delay• Revenue loss due to key installation
equipment damaged on site• Transportation, installation and ongoing
operation• All parties agreed under contract• Third party property damage and bodily injury
(TPL)• Design defect – LEG2 vs LEG3
What’s not covered?
• Non-damage (S&L)• Delay from schedule slippage• Contractor’s plant and equip.• Vessels – damage or liability• Wear and tear (normal)• Corrosion (normal)• Warranties and guarantees• Assets not included in the Sum Insured• Breach of the MWS recommendations• Lack of Due Diligence
Defects Cover
CAR Claims 2002 - 19
Number of CAR claims
Cable claims 40.3 % Collision 6.9 % Electrical 12.5 % Foundations 15.3% Fire 1.4 %
Lightning 2.8 % Blades 4.2 % Assembly 6.9 % Deductible 9.7 %
40%Cable Claims
CAR Claims 2002 - 19
Share of total Claims Cost
Cable claims 83.2% Collision 0.6% Electrical 4.5% Foundations 9.5% Fire 0.3%
Lightning 0.3 % Blades 0.3% Assembly 0.8% Deductible 0.8%
83% of claimed costs
CAR Claims 2002 - 19
65% Vessel Costs1%
16%
5%
5%
8%
BREAKDOWN OF COSTS
Vessel Charges = 65% Special Machinery (Third Party) = 1%
Site Works (contractor labour) = 16.5% Materials = 5%
Engineering (survey / consultants) = 4.5% Admin (overhead / legal / insurance) = 8%
CAR Claims - Cables
• Average claim cost: USD 2,500,000
• Inter- array cable damage: USD 1,500,000 – 10,000,000
• Export cable damage: USD 8,500,000 – 30,000,000
• 57 of the last 60 construction projects have experienced cable claims
• Vessel costs a major contributor (USD 120,000 – 350,000 p/day)
Challenging Operations
Claim: Circa USD 3,620,000
Damage: Birdcage in 132kV Export Cable
Cause:• Tracked vehicle – Nessie V was having problems gaining traction on the mud flats• Cable rollers were pinching the cable, not allowing it to rotate• Torsion build up in the cable caused it to birdcage approximately 522m into the operation
Poor Workmanship
Claim: Circa USD 1,400,000
Damage: Failed 132kV joint
Cause:
• Prolonged overheating of the cable and joint
• Air void in the bitumen filled joint
• Poor connection between the conductor and the compression ferrule / connector
• Joint 1 showed gaps between the conductors and connector body
Poor Workmanship
Claim: Circa USD 4,250,000
Damage: 132kV Export Cable and submarine joint
Cause:
• Lifting frame was incorrectly hooked up to manoeuvring points and not lifting points
• Manoeuvring points failed dropping the cable and frame
Lessons Learned:
• Operators were not familiar with the frame and its safe operation
• The lifting points were not clearly colour coded, which is good practice
Poor Workmanship
Cables – Catenary Management
Claim: Circa USD 5,000,000
Damage: Significant damage to 56m of 132kV Export cable
Cause: Too much cable paid out, slack cable formed in front of the plough skid. Poor management of cable catenary
Lessons Learned:• Plough was working within its design parameters but at its operating
limits• Cable Surveillance equipment on the plough was not ideal and has
since been improved
Cables – Catenary Management
Claim:
Circa USD 1,500,000 – 10,000,000
Damage:
33kV Cable out of spec (MBR)
Cause:
• Poor catenary management
• Slack in cable, introduced a loop
• Loop tightened beyond MBR during pull in
Cables – MWS / Weather
Claim: Circa USD 9,950,000
Cause:
Small weather front which was un-forecast came through the area giving unexpected direction and wind speed. The barge was in survival position, but was not able to survive the almost-beam-on winds and swells from this unexpected system
Damage:
Significant damage to Export cable & Plough
Lesson Learned:
MWS provided strong recommendations to consider seeking shelter, Barge Master decided to continue
Offshore – Standby / WoW
Offshore – Transit
Claim: Circa USD 40m (cables, deck equipment, carousel)
Cause: Loose or missing hatch covers, flooding of the ballast tanks
Damage: Total loss of 2 x Export cables in 3000m+ of water
Lesson Learned: Importance of MWS suitability and towage survey
OAR – Claims
• Offshore wind farms are relatively new, so portraying operational loss data requires a projected model.
• Majority of losses relate to component damage or failures. Including wear and tear.
• Increased mechanical damage compared to electrical
• Less frequent and severe workmanship claims
• Defects may be latent, manufacturing or design orientated
• BI cover more common in OAR policies
Cable losses - Summary
• Poor workmanship• Sub-contractor inexperience • Recklessness due to tight deadlines • Use of the wrong vessel or equipment for the task• The time allocated for these sub-contractors is kept to a minimum due to high vessel costs – sometimes shortened by weather
conditions• Cable laying is a complicated task e.g. busy shipping lanes, weather and tidal effects etc.
OAR – Claims Blades
Serial Defects / Damage
Case Example
Circumstances: During the ballast infill of 6 Gravity Based Foundations, internal J-tubes collapsed.
Root cause findings: J-tubes were under designed for the service environment
Repair: Fitting 11 redesigned - External J-tubes (policy LEG3 excl. applies)
Cost of repair: GBP 24,000,000 (gross)
Wording
SERIES LOSS CLAUSE
Subject to the terms and conditions of the Policy Underwriters shall indemnify the Assureds in respect of loss or damageresulting from a fault, defect, error or omission in design, plan, specification, material or workmanship of the same nature,after application of the deductible and as covered under Clause XX and buy-back if applicable of Section I Terms andConditions according to the following scale:
100% of the first loss amount.
75% of the second loss amount.
50% of the third loss amount.
No liability hereafter for third and subsequent loss amounts.
Adjustment
Series Loss Clause
GBP
Cost of repair (gross) 24,000,000
Audit adjustment (2,000,000)
LEG3 adjustment (1,000,000)
WOW limit adjustment (500,000)
Adjusted claim (gross) 20,500,000
Less Deductible (500,000)
Adjusted claim net (before SLC) 20,000,000
Number of defective parts 11
Cost per loss amount 1,818,182
Series Loss Clause
First loss 100% 1,818,182
Second loss 75% 1,363,636
Third loss 50% 909,091
Fourth loss 0% -
Weighted
Even
Adjusted Claim (after SLC) GBP 4,090,909
The Loss Amount?
Defective part Loss Amounts SLC loss amount
(GBP)
SLC application
(GBP)
Foundation 6 3,333,333 7,500,000
J-tube 11 1,818,182 4,090,909
Adjusted Claim (after SLC – 6 foundations) GBP 7,500,000
Even vs Weighted?
What measurement basis to use:
• Weighting using order of repair, order of discovery, order of construction, order of damage?
• Weighted using duration based on DPR review, with most favourable turbines picked
Weighted Claim (after SLC) GBP 11,700,000
Direct & Indirect Costs?
Types of costs Allocation of costs Cost
(GBP)
Engineering Indirect 4,000,000
Commercial Direct 2,000,000
Operations Direct 12,000,000
Contracts Direct 2,000,000
Total cost 20,000,000
Direct costs = Cost which can be allocated to specific WTG’s
Indirect costs = Costs will be incurred regardless of the number of WTG’s repaired e.g. design costs
Should these costs form part of the SLC?
After SLC + weighting = GBP 9,36m
Weighted Claim (after SLC) + Indirect Costs GBP 13,360,000
Should the adjusted claim be?
a) GBP 4.1m? b) GBP 13.4m? c) Somewhere in between?
(Large delta of GBP 9.3m)
Settlement Options?
• Rapidly growing industry, opportunities for Insurers throughout the supply chain
• Familiar technology onshore renewables and offshore oil & gas
• Constantly evolving to reduce costs & increase efficiency, keeping up with Policy and technology challenges is very important
• Understanding the key Risks will drive down the costs of developing offshore wind. “Cabling is still the primary loss statistic”
• Economical Solution vs Local content, critical hurdle in delivering projects on time, to budget & safely in the USA
• Advantage of being a late entrant, learning from the first movers. UK spent as little as ½ as Germany to deliver an offshore wind grid
Summary:
OFFSHORE WIND THANK YOU!
Q&A ??
RECENT DEVELOPMENTS IN
US CAPACITY MARKETS
RECENT DEVELOPMENTS IN
US CAPACITY MARKETS
Introduction: Steve Gregoire
Vice President / Principal – Meaden & Moore
Sam Newell
Principal, The Brattle Group
Copyright © 2019 The Brattle Group, Inc.
Recent Developments in U.S.
Capacity Markets
PRESENTED TO
NY PowerCon
PRESENTED BY
Sam Newell
Principal and Co-Leader of The Brattle Group’s Electricity Practice
May 16 2019
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Disclaimer
The contents of this document represent our understanding of various markets and analysis ofmarket conditions. It is entirely based on our interpretation of publicly available information.
Nothing in this presentation should be interpreted as a prediction of future prices or marketclearing results.
The Brattle Group does not accept any liability with respect to this presentation, any omissionsconcerning this presentation, any reliance that you may place on this presentation, or anyrepresentations (express or implied) made by The Brattle Group or concerning thispresentation. The Brattle Group and its affiliates, and their respective principals, employees,directors, officers and agents will not accept liability under any theory for losses suffered,whether direct or consequential, arising from your reliance on the presentation, and cannot beheld responsible if any conclusions drawn from the presentation or any explanations in relationthereto that are made should prove to be inaccurate.
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Agenda
Why Capacity Markets?
Key Features that Differ by Market
– Forward and Delivery Timeframe
– Demand Curves
– Locational Capacity Pricing
– Capacity Performance Incentives
– Winter Energy Security
Market Prices and Fundamentals
Regulatory Uncertainties
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Why Capacity Markets?
Capacity markets help meet resource adequacy requirements in restructured jurisdictions, where resources are supplied not by regulated utilities, but by merchant investors who sell into wholesale markets
– Load serving entities must buy enough capacity to meet their peak load + reserve margin (often with the RTO procuring on their behalf)
– Resources compete to provide that capacity at least cost– Resources that “clear” are paid the capacity clearing price– Forward clearing moderates boom-bust
The price needed to clear the market is positive because energy margins are typically insufficient to attract enough resources to meet the target reserve margin; this “missing money” has two causes:
– Energy prices may be below the true marginal system cost– Even if prices reflected the marginal system cost, an energy-only market would provide the economically optimal
reserve margin, but this would likely be below the high levels mandated based on “1-in-10”; such high reserve margins depress energy prices, so an additional payment is needed
– In addition, resulting reserve margins may be unacceptably variable/uncertain
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Summary of Capacity Markets Experience
Capacity markets are meeting objectives:
– Meeting resource adequacy objectives
• All markets in surplus or balance
– Fostering competition to lower costs
• Retention of existing capacity
• Surprising amount of new DR, uprates, and imports
• Need for costly new generation was deferred
• Clearing prices have generally been far below expected costs, even with new entry
– Supporting merchant generation entry
• PJM attracted over 26 GW new generation in past 7 auctions, majority from merchants
Many ongoing refinements have been needed to ensure resources provide the reliability they advertise, to mitigate price volatility, and address market power
Case Study: PJM Attracting New Entry
In PJM, 25 GW of coal generation retired in only a few years due to new Mercury and Air Toxics Standards; the capacity market responded with replacement capacity, incl. merchant generation
Delivery Year
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KEY FEATURES THAT DIFFER BY MARKET
Forward and Commitment Periods
Commitment Period 1 year except‒ 1 to 6 months in NYISO‒ ISO-NE offers new 7-year price lock‒ UK offers new 15-year term; 3 for refurbishments‒ Ireland offers new up to 10-year term
Forward Periods in Other Markets
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KEY FEATURES THAT DIFFER BY MARKET
Capacity Market Demand
0%
50%
100%
150%
200%
250%
300%
85% 90% 95% 100% 105% 110% 115% 120%
Pric
e (%
of N
et C
ON
E)
% of Resource Adequacy Needs
NYISO
PJM
ISO-NE
Net CONE
Great Britain
IESO - Summer
IESO - Winter
AESO
Administrative Demand Curves, by Market
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KEY FEATURES THAT DIFFER BY MARKET
Locational Pricing
PJM Base Residual Auction Results for 2021-22
NYISO ICAP Auction Zones ISONE Auction Results for 2022/23
$125
$125$125
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KEY FEATURES THAT DIFFER BY MARKET
Capacity Performance (PJM & ISO-NE)
Definitions:PPR = Performance Penalty Rate ($/MWh)
PJM: Net CONE ($/MW-yr) ÷ 30 hours = about $3,500 today
ISO-NE: $2,000 thru 5/21, $3,500 thru 5/24, then $5,455
CPBR = Capacity Performance Bonus Rate ($/MWh)
Bonus rate < PPR due to uncollected penalties from exemptions and approved outages (in PJM) and stop-loss
B = Balancing Ratio (%)
Demand in hour relative to capacity commitments
[load + reserves] ÷ [System UCAP Committed]; max of 1.0
Determines Expected Performance “share” per UCAP MW
A = Availability (%) (THE KEY PERFORMANCE METRIC)
Actual output of energy + reserves during emergency hours
Expressed as a % of UCAP CommitmentH = Hours (THE KEY MARKET UNCERTAINTY)
Hours of emergency events per year
Hourly Penalty Charges
PPR × (B – A)• Resources’ Expected Performance is their “share” of the
load + reserves during emergencies, i.e. [UCAP Committed] × B
• Charged for shortages relative to Expected
Hourly Bonus Payments
CPBR × (A – B)• Capacity resources earn a bonus payment for outputting
energy + reserves in excess of Expected Performance
Note: resources operating without a capacity commitment are also eligible for payment, as if B=0
ISO-NE and PJM introduced stronger real-time performance incentives without exposing load, by introducing $2,000-5,000/MWh price adders while embedding a financial call option in capacity obligations, such that under-performers fund over-performers
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New England is vulnerable to cold snaps, when little pipeline gas is available to generation
– Raises risk of shortages (see right)
– Led to out-of-market actions
• Former winter reliability program
• Mystic RMR
– RMR prompted FERC to request in-market solutions
• Already have PFP, high energy shortage prices
• ISO-NE proposes MDAM, DA reserves of RT options, possible pre-winter procurement of options
• But these may not suffice to avoid future RMRs, so may need more, e.g.,
▪ Enhanced RT pricing and/or
▪ Fuel-secure capacity constraints in FCM (as contemplated in PJM)
KEY FEATURES THAT DIFFER BY MARKET
Winter Fuel Security in ISO-NE
Source: https://www.iso-ne.com/static-assets/documents/2018/01/20180117_operational_fuel-security_analysis.pdf
ISO-NE scenario analysis of winter shortages in 2024-25 with 1-in-8 year cold winter
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Some ISOs are moving to insulate capacity prices from the effects of “subsidized” supply
– New rules go beyond the prior minimum offer price (MOPR) provisions designed to prevent manipulative price suppression
– Concept is to restore capacity prices to the higher level that would be produced without subsidies
– FERC approved ISO-NE’s 2-stage design
• Stage 1 sets price, with policy resources’ offers mitigated upward, so may not clear
• Stage 2 substitution auction allows cleared resources to retire and pay uncleared policy resources (at a discount to the forward price) to take on their capacity supply obligation
• RECs are considered “in market” revenues
KEY FEATURES THAT DIFFER BY MARKET
Adjusting for the Effect of State Policies
PJM “Extended RCO” Proposal• Stage 1 sets cleared quantities, with policy
resources at a low offer price
• Stage 2 sets prices for non-policy resources (policy resources are not paid)
• RECs are considered subsidies
• This proposal (and an alternative) is still pending before FERC
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MARKET PRICES AND FUNDAMENTALS
Comparison Across Markets
Select Capacity Market Prices
Sources: ABB Velocity Suite, PJM Capacity Market (RPM), NYISO Market Monitor Annual Reports
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MARKET PRICES AND FUNDAMENTALS
Successfully Attracted New Gen
New Generation by ISO and Capacity Auction
Notes: New generation includes renewable generation added for reasons other than capacity, but the vast majority is gas-fired. Also includes uprates to existing generation. Sources: PJM Capacity Market (RPM) 2021/22 Results, ISONE FCA Results
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MARKET PRICES AND FUNDAMENTALS
Future Pricing Will Shift from Energy to Other Products and Services
Market Value Market Implications
Energy▀ Lower energy prices on average and in most hours▀ But much higher on-peak prices, driven by CO2 pricing for remaining fossil, scarcity pricing,
and demand response/storage
Flexibility & Scarcity Pricing▀ Need for greater quantities and new types of flexibility products▀ Higher price volatility and spikes reward flexibility
Capacity
▀ Value may go up or down▀ Down if additional clean energy contributes to excess supply for a period, or if new
capacity sellers are attracted by other value streams▀ Up if new fossil plants are needed for capacity, but only a small portion of their capital
costs can be recovered from other markets
Carbon and Clean▀ Some form of CO2 pricing and/or clean energy payments introduced to meet policy and/or
customer demand▀ Value must be large enough to attract new clean resources
Adjacent Consumer Products & Services
▀ Technology and consumer-driver demand for adjacent products and services (smart home, electric vehicles)
▀ Participation may overlap with wholesale, clean, and retail/distribution markets
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Regulatory Uncertainties
State-sponsored clean energy
storage
“Mitigation” of policy resources
in wholesale markets
Electrification policies
Out-of market responses to
evolving reliability
challenges?
Carbon pricing (NYISO)
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Additional Reading
Brown, Lessem, Lueken, Spees, and Wang, “High-Impact, Low-Probability Events and the Framework for Reliability in the National Electricity Market,” prepared for The Australian Energy Market Commission, February 2019.
Newell, Spees, Carroll, Kaluzhny, with Carden, Wintermantel, Krasny (Astrape), “Estimation of the Market Equilibrium and Economically Optimal Reserve Margins for the ERCOT Region, 2018 Update,” prepared for ERCOT, December 20, 2018. (See also original 2014 report).
Spees, Pfeifenberger, Newell, Chang, “Harmonizing Environmental Policies with Competitive Markets: Using Wholesale Power Markets to Meet State and Customer Demand for a Cleaner Electricity Grid More Cost Effectively,” discussion paper, July 2018.
Chang, Spees, and Pfeifenberger, “Hello World: Alberta's Capacity Market,” Presented at the 2018 IPPSA Conference, March 18, 2018
Newell, Oates, Pfeifenberger, Spees, Hagerty, Pedtke, Witkin, Shorin, “Fourth Review of PJM’s Variable Resource Requirement Curve,” report prepared for PJM Interconnection LLC for submission to FERC and PJM stakeholders, April 16, 2018. (See also first three reviews from 2008, 2011, and 2014).
Newell, Hagerty, Pfeifenberg, Zhou, Shorin, Fitz, with Gang, Duou, Wroble (Sargent & Lundy), “PJM Cost of New Entry Combustion Turbines and Combined-Cycle Plants with June 1, 2022 Online Date,” report prepared for PJM for submission to FERC and stakeholders, April 19, 2018. (See also prior reviews in 2011 and 2014).
Newell, Pfeifenberger, Chang, Spees, “How wholesale power markets and state environmental Policies can work together,” Utility Dive, July 10, 2017.
Spees, Newell, Pfeifenberger, “Capacity Markets: Lessons Learned from the First Decade,” Economics of Energy & Environmental Policy. Vol. 2, No. 2. Fall 2013.
Pfeifenberger, Spees, Newell, “Resource Adequacy in California: Options for Improving Efficiency and Effectiveness,” October 2012.
Newell, Spees, Pfeifenberger, Mudge, DeLucia, Carlton, “ERCOT Investment Incentives and Resource Adequacy,” June 2012.
Pfeifenberger, Newell, “Trusting Capacity Markets: Does the Lack of Long-Term Pricing Undermine the Financing of New Power Plants?” Public Utilities Fortnightly. December 2011.
Pfeifenberger, Spees, “Evaluation of Market Fundamentals and Challenges to Long-Term System Adequacy in Alberta’s Electricity Market,” April 2011 (Original Study), and March 2013 (Update).
Newell, Spees, Hajos, “The Midwest ISO’s Resource Adequacy Construct: An Evaluation of Market Design Elements,” The Brattle Group, January 19, 2010.
Hesmondalgh, Pfeifenberger, Robinson, "Resource Adequacy and Renewable Energy in Competitive Wholesale Electricity Markets,” BIEE, September 2010.
Pfeifenberger, Spees, “Best Practices in Resource Adequacy,” PJM Long Term Capacity Issues Symposium, January 27, 2009.
LaPlante, Chao, Newell, Celebi, Hajos, “Internal Market Monitoring Unit Review of the Forward Capacity Market Auction Results and Design Elements,” ISO New England and The Brattle Group, June 5, 2009.
Newell, Bhattacharyya, Madjarov, “Cost-Benefit Analysis of Replacing the NYISO’s Existing ICAP Market with a Forward Capacity Market," The Brattle Group, June 15, 2009.
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PRESENTED BY
SAM NEWELL
Principal, [email protected]
Dr. Samuel Newell is a Principal and co-leader of The Brattle Group’s Electricity Practice.
He has 20 years of experience supporting electricity industry clients in regulatory, litigation, and business strategy matters. Hisexpertise is in wholesale electricity market design and analysis, generation and transmission asset valuation, andenergy/environmental policy analysis. Most of his work is in the context of the industry’s transformation to clean energy. Dr. Newellfrequently provides testimony and expert reports to Independent System Operators (ISOs), the Federal Energy RegulatoryCommission (FERC), state regulatory commissions, and the American Arbitration Association.
He earned a Ph.D. in Technology Management & Policy from the Massachusetts Institute of Technology, an M.S. in Materials Science& Engineering from Stanford University, and a B.A. in Chemistry & Physics from Harvard College.
Prior to joining Brattle in 2004, Dr. Newell was the Director of the Transmission Service at Cambridge Energy Research Associates.Before that, he was a Manager in the Utilities Practice at A.T. Kearney.
The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. or its clients.
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THE POWER OF ECONOMICS
brattle.com
Coffee Break
NEW RISKS, NEW REACTIONS
POWER & ENERGY INSURANCE
May 16, 2019
LEGAL UPDATE – CAPACITY PAYMENTS
LEGAL UPDATE – CAPACITY PAYMENTS
Jeff Weinstein
Mound, Cotton, Wollan & Greengrass LLP
THE PROBLEM• P o we r p l a n t s h a ve t wo f u n c t i on s n o w: s u p p l y i n g e n e r g y a n d
s u p p l y i n g c a p a c i t y
• Tr a d i t i o n a l b u s i n e s s i n t e r r u p t i o n c o ve r a g e a d d r e s se s l o s s e s t h a t
h a p p e n a n d c a n b e m e a s u r e d d u r i n g t h e “ p e r i o d o f i n d e m n i t y ”
• L o s s o f c a p a c i t y d u r i n g t h e “ p e r i o d o f i n d e m n i t y, ” h o we ve r, c a n
r e s u l t i n i n c o m e l o s s e s r e a l i z e d m u c h l a t e r i n t i m e
• C u r r e n t b u s i n e s s i n t e r r up t i o n wo r d i n g s d o n o t a c c o u n t f o r t h e s e
c i r c u m s t an ces
Business Interruption:
This Policy insures the actual loss of business income you sustain due to the necessary suspension of your operations during the Period of Liability. The suspension of your operations must be caused by direct physical loss of or damage to property at the described premises, including personal property in the open, or in a vehicle, within 1000 feet, caused by or resulting from a Covered Cause of Loss.
Measurement of Business Interruption Loss:
The recoverable Business Interruption loss is your Actual Loss Sustained of the following during the Period of Liability:
(i) Net Profit, before deducting income taxes, which is not earned as a direct result of the interruption of production or suspension of business operations or services; and
(ii) Fixed Charges
(iii) Ordinary payroll
Period of Liability:
The Period of Liability is the period:a) starting from the time of direct physical loss or damage of the type insured against; and
b) ending when with due diligence and dispatch the building and equipment could be:
(i) repaired or replaced; and (ii) made ready for operations;
under the same or equivalent physical and operating conditions that existed prior to the damage.
Extended Period of Liability:
Business Interruption coverage is extended to cover the reduction in sales resulting from the suspension of your operations for such additional length of time as would be required with the exercise of due diligence and dispatch to restore your business to the condition that would have existed had no loss occurred, commencing with the date on which the liability of the Company for loss resulting from interruption of business would terminate if this extension had not been included herein.
CAPACITY PAYMENT LOSS TIMELINE
1/1 6/303/1 4/1 12/3110/1
Period of Liability/Recovery
Waiting Period
Capacity Auction Capacity Auction
EPOL
8/29
FUTURE LOST EARNINGS
Situations where business losses are not felt until after the period of indemnity ends:
• Loss of earnings from contracts that the insured would have entered into during the period of indemnity; or
• Loss of contingency fees from cases a law firm would have received during the period of indemnity
Gates v. State Auto. Mut. Ins. Co., (Tenn. Ct. App. 2005)
• Insured operated a rent-to-own business, under which customers purchased furniture on installment; the insured’s accounting did not credit the contract payments as income until after the payment was actually received
• The insured’s business was closed for several months due to tornado damage• The policy provided coverage for “actual loss of business income” during the period
of restoration• The insured sought to recover the entire value of sales contracts that would have
been signed during the period of restoration, even though payments under those contracts would not have become due until after the period of restoration
• In order to place the insured in the position that it would have been had the interruption not occurred, and considering the nature of the insured’s business, the court held that the insured was entitled to recover value of contracts that were not entered into during the period of restoration
Bernstein Liebhard, LLP v. Sentinel Ins. Co., Ltd., (1st Dep’t 2018)
• Law office was damaged by fire and insured sought coverage for contingency fees for cases it alleged it would otherwise have received, but did not because of the interruption of business
• The Policy provided coverage for the “‘actual loss’ of business income due to the necessary suspension of operations . . ..” that would have been “‘earned’ during the twelve months after the fire”
• Held: fees from settlements and judgments that would eventually have resulted from lost clients would not have been “earned” by the law firm within the 12-month period following the fire
LOST CAPACITY PAYMENTS
National Union Fire Ins. Co. of Pittsburgh, PA v. TransCanada Energy USA, Inc. (N.Y. Sup. Ct. 2016), aff’d (1st Dep’t 2017)
▪ A power plant turbine was taken out of service following the discovery of a
preexisting crack
▪ Insured sought coverage for decreased capacity revenues for the period of
time that the turbine was being repaired, even though the auction was held
after the period of recovery
▪ The court held that the insured’s loss was its decreased capacity and that
this loss was sustained during the period of liability, even though the
amount of the loss was not ascertained until after the period of liability when
the auctions were held
THE SOLUTION
• Draft policy wording that specifically accounts for the concept of lost capacity payments, taking into account:
o The inevitability of the loss (what needs to be proven)
o How such loss is to be measured
THE SOLUTION
• Endorsements specific to capacity payments can:
o Subject coverage to specific limits and deductibles
o Tie the actual loss of capacity payment to an interruption of the insured’s power generating capability as a result of physical loss or damage to covered property from a covered peril
o Define what loss is covered (capacity payments, additional non-performance charges, and/or lost bonus payments)
o Contain exclusions for, e.g., loss incurred directly or indirectly as a result of, or made worse by, planned outages or idle periods
BROKER/UNDERWRITER PANEL–
CAPACITY PAYMENTS
BROKER/UNDERWRITER PANEL –
CAPACITY PAYMENTS
Moderator: Steve Gregoire
Vice President / Principal – Meaden & Moore
Mike Perron
Power Generation Leader – North America, Willis
Towers Watson
Justin Byrne
Vice President, AEGIS Insurance Services
ENGAGING YOUNGER TALENT
IN INSURANCE WORKFORCE
ENGAGING YOUNGER TALENT
IN INSURANCE WORKFORCE
Introduction: Dan McLeodClaims Manager, US Energy & Construction, Liberty
Specialty Markets
Tony CañasClient Advisor, Insnerds.com
Capstone
May 16, 2019
NEW RISKS, NEW REACTIONS
POWER & ENERGY INSURANCE