Tuesday,March6,2018Houston,TX

3:30–4:30p.m.

EVOLVINGRISKSINTHERENEWABLEENERGYSECTOR

Presentedby

DanielS.McGarveyManagingDirector

Marsh

Therenewableenergysectorisrapidlyevolving,andrenewableenergyisnowanintegral component of the world’s power. As the use of renewable energyincreases and as technologies anddistribution evolve, the risks associatedwithrenewableenergyprojectscontinue togrow.Thissessionwilldiscussemergingrisks associated with renewable energy projects, as well as risk managementtechniquesandinsurancesolutionstoaddresstheserisks.

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DanielS.McGarveyManagingDirector

MarshMr.McGarveyisthechairmanofMarsh’sUSUtilityPractice,whereheoverseestheserviceofmorethan250utilitycustomers.Hehasservedthefirminmanycapacities,focusingprimarilyontheser-viceofconstruction,publicsector,power,andnuclearclientsduringhis28yearswithMarsh.Mr.McGarveygraduatedfromtheUSNavalAcademyandisaretirednavycommanderwhoservedinthenuclear surface ship community, attaining thedesignationofNavalNuclearChiefEngineer.HejoinedMarshin1989asanuclearriskconsultantandhasservedthefirmasaclientexecutive,salesprofessional,casualtyunitleader,regionalconstruction,publicsector,andutilitypracticeleader,nation-alnuclearpracticeleader,regionalsalesleader,andofficeleader.Mr.McGarveyhasbeenrecognizedfivetimesasoneofthenation’smostinfluentialinsurancebrokersinRisk& Insurancemagazine’sPowerBroker issueandhasalsobeenhonoredasaResponsibilityLeader,aRIMS(theriskmanagementsociety)Fellow,andtheinauguralwinneroftheRIMSAmbassa-dorAward.HeisanaccomplishedspeakerandinstructorandawinnerofIRMI’s“WordsofWisdom”award,havingpresentedhundredsofseminarsonriskmanagementtopics,including37sessionsde-liveredatthenationalRIMSconference.

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Evolving Risks inthe Renewable Energy Sector

Presented by:

Daniel S. McGarveyManaging Director

Marsh

#IRMI2018 1

The Evolution of Renewable Energy – 2003 View• What do we do when the sun doesn’t shine and the wind doesn’t blow?• Renewable technology is unproven on a utility scale.• Wind and solar farms? NIMBY!• Projects are wholly dependent upon government tax subsidies – an

unsustainable - and maybe even unfair - situation.• Why not employ clean coal and carbon capture technology instead?• Utilities only adopting because they are forced to by state regulator

imposed Renewable Energy Standards.• A grid reliant upon renewable resources will be less dependable.

#IRMI2018 2

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Renewable Energy Viewed As…

#IRMI2018 3

The Evolution of Renewable Energy – 2018 View• Battery and other storage technologies advancing at lightning speed.• Renewable technology has advanced to be competitive with

traditional generating technologies even at utility scale.• First U.S. offshore wind project completed. More are planned.• One state aims to be 100% dependent upon renewable energy.• Corporations are driving renewable projects for brand building

purposes.• Distributed Generation might just make for a more secure grid.

#IRMI2018 4

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Continued Wind Energy Progress• On track to surpass U.S. Hydroelectric capacity this year.1

• Wind capacity is projected to grow nine percent this year.1

• If these projections are correct, wind power will make up nearly seven percent of utility scale generation in the U.S. for 2018.1

• On track to generate one fifth of the country’s electricity by 2030.• Technology continues to improve.

1. Department of Energy

#IRMI2018 5

Continued Wind Energy Progress

• Topical controversies:•Bird strikes• Flicker effect•Noise•Wake effects• End of life disposal

#IRMI2018 6

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Wind Energy and Avian Encounters• Wind turbine blades can be hazardous to birds and bats, with the

most significant number of encounters involving predatory birds like hawks and eagles.

• Federal regulators have brought criminal charges to protect wildlife in the case of windfarms placed in migratory paths.

• One site has incurred more than $500,000 per year in bird strike mitigation measures.

• Significant brand risk issues are associated with a pattern of bird strike events.

#IRMI2018 7

Wind Energy and Human Health• Low frequency noise associated with windfarms has been associated

with maladies ranging from headaches to sleeplessness to depression.• These are grouped under a term “Wind-Turbine Syndrome” which is

seeing increased use and generating a variety of studies.• Whether symptoms claimed are actually associated with windfarm

sound or vibration remains an open question.• Engineers are working to dampen the noise generated by these

devices.• Flicker effect may trigger seizures in some individuals.

Source: Julia Layton – How Stuff Works

#IRMI2018 8

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Offshore Wind – The Next Great Leap ForwardIn Europe:• First project in Denmark – 1991• 91% of offshore wind today is in Europe• This represents more than 11,500 MW of capacity• 6 MW turbine are most popular for current projects

In the United States:• Block Island project encompasses five 6 MW units• Replaced diesel as primary power source• Can power over 17,000 homes• Several other projects under development

#IRMI2018 9

Offshore Wind Projects• Significant advantages over land based• Risk challenges increase exponentially

• Marine specific insurance coverages• Hazard to navigation• Hurricanes• Cable connections to shore – A key source of claims• Complexity of construction• Availability of large marine cranes for maintenance/repairs• Weather disruptions – construction delay• Decommissioning

#IRMI2018 10

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#IRMI2018

There are practical limitations on how large

individual turbines can be constructed. At a certain point, the excess costs of manufacturing, transport and construction exceed

the incremental benefit of MW output. Also, the

largest turbines are only effective in areas of high

wind speeds (largely offshore).

Source: CleanTechnica

Practical Limitations?

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Wind Does Not Work Everywhere…

#IRMI2018

Map illustrating installed wind generating capacity for U.S. states Source: Wikipedia

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Solar Power – A Rising Star

#IRMI2018

Solar EnergySurpassed 32 GW

last year and itsuse is rising

exponentially

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Solar Energy Projects – Key Risk Issues• Installing solar panels appears to be straightforward; construction risk

would appear limited• Once in place – no moving parts in most installations• Inverter required to convert DC to AC for grid integration• Solar panels are fragile, therefore weather impacts create most exposure• Theft is also an issue, both during construction and operational phase –

sometimes only of the copper interconnection cabling• Obsolescence is a key risk issue in view of the pace of technology• Performance degradation presents uncertainty• End of life disposal challenges have yet to be addressed

#IRMI2018 14

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Solar Panels – Ever Improving Efficiency

#IRMI2018

Source: DOE

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Solar Risk Drivers• Solar investment decisions are strongly conditioned by concerns about long term

performance / degradation of panels• Manufacturers / suppliers usually give a performance guarantee to the customer

(which, itself, is usually the object of some type of insurance)• Financiers / project developers need to look at the counterparty risk associated

with these warranties• When a solar plant changes hands:

• Is the OEM warranty transferable? • Is the issuer still able to respect the obligations? • Can the new owner rely on protection inherited from the seller, or is there perhaps an

“aftermarket” performance guarantee available?

#IRMI2018 16

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Solar Thermal Plants• Utility scale generation from a solar source.• Ivanpah facility in the Mohave Desert can generate 392 MW.• 4000 acres, 173,500 mirrors, each 151 ft2

• Cost of $2.2 billion – not inexpensive.• Environmental challenges:

• Desert tortoise, etc.• Mirror cleaning• “Streamers”• Natural gas warm-up is required• Multiple choke-points• Decommissioning

#IRMI2018 17

Solar Thermal Plants• Alternate approach: Parabolic trough mirrors• SEGS in California generates 354 MW from three mirror fields• 936,400 mirrors, 1600 acres• Mirrors concentrate sun’s heat on synthetic oil tubes, that then

transfer heat to produce steam• Natural gas backup systems

#IRMI2018 18

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Solar Panel Materials as a Limiting Factor• Rare Earth Metals are essential for the production of solar modules.• China produced 84% of global Rare Earth Metals in 2016.1

• This supply chain bottleneck has the potential to disrupt the continued development of solar energy projects.

• Mining of REMs can be harmful to the environment, as is the improper disposal of expended solar panels.

#IRMI20181. Source: Statista

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Solar Claims

• Hail• Fires (w/Firefighter Risk)• Lightning• Natural Hazards incl. wildfires• Theft

#IRMI2018

“The average solar claims severity in the last 5 years has increased by 87% predominantly as a result of the greater impact of weather related losses” - GCube

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Geothermal Energy

#IRMI2018 21

Geothermal Energy

• Can be traced to 1904 when in Italy a geothermal generator lit 5 light bulbs

• Next plant not until 1958 in New Zealand

• First U.S. plant in 1960 “The Geysers” operated by PG&E: 11MW

• Theoretically, no point on the earth’s surface is ruled out as a location, but economically accessible depth (about 3,000 metres) limits locations.

• US currently produces around 3,500MW of geothermal power – around 30% of the global total

• Baseload power with very small carbon footprint

#IRMI2018 22

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Geothermal Energy• Geothermal employs the energy of the earth to power conventional

steam turbine units – Boiler and machinery issues like any steam plant• Direct steam usage is limited due to corrosive nature, so binary plants

are much more prevalent• Operating insurance readily available from conventional power insurers• The big difference: exploration risk.

• In 2004 first exploration risk policies. Very few insurers with little capacity, high premiums, difficult to place, no standard wordings

• In 2014 losses outstripped premiums by a factor of three

#IRMI2018 23

Geothermal Energy Risks• At least 2 wells required (production and injection well). • $ 5-20 M per well depending on geology, depth, extend of

directional drilling and circumference.• Investment into wells potentially stranded if resource not proven

after drilling.• Corrosiveness of thermal source geology can cause premature

component failure.

#IRMI2018 24

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Biomass – A Renewable Fuel• Is it really considered “Renewable Energy?”• 10 GW active capacity in the U.S. (second only to hydroelectric today

among renewable sources)• Encompasses many different fuels

• Wood waste• Municipal waste• Agricultural waste

• Pelletized wood fuel is a significant export commodity• Gasification as another option

#IRMI2018 25

Biomass – More Prevalent Than You Think

#IRMI2018 26

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Biofuel Usage Continues to Grow

#IRMI2018 Source: PERse27

Biomass Energy – Not Without Controversy• Biomass crops carry the same environmental impacts as food crops in

terms of pest control, watering, deforestation and erosion. • Harvesting plants for the production of energy can also increase

greenhouse gases, since 25 percent to 30 percent of greenhouse gases released each year are from deforestation.

• The transport of waste from forestry and industry to a biomass plant carries a significant carbon footprint.

• Despite being a relatively clean alternative to more harmful fossil fuels, biomass still generates harmful toxins that can be released to the atmosphere as it is combusted.

Source: Sciencing, April 25, 2017

#IRMI2018 28

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Hydroelectric Power – Cleanest of the Clean• Hydroelectric plants require little maintenance and run continuously

for long periods of time.• Why wouldn’t we dam every river to tap this extraordinary power

source?• Downstream catastrophe exposure• Damage to the riverine ecosystem• Fish migration issues

• The effort and expense required to license a new hydroelectric facility is immense in view of the many potential environmental impacts.

#IRMI2018 29

Distributed Generation• A new approach to electricity generation and distribution.• Provides a degree of independence and security to the individual

consumer or community.• Still requires a grid for backup power and to absorb excess power

produced.• Tax incentives to support it are common: Critique – May subsidize those well off enough to afford the technology

Outcome – The “average” consumer may pay more

#IRMI2018 30

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The Challenges of Distributed Generation• Grid instability• Power quality issues• Excessive cycling of standby units• Challenge to long term planning• Perceived subsidization of early adapters• A Pandora’s Box of installation quality issues• Responsibility for long term performance?• Exposure to first responders

#IRMI2018 31

Energy Storage Advancements – The Holy Grail• The storage of renewable energy has the potential to overcome its

most obvious flaw.• Storage solutions bring their own suite of inefficiencies, but progress

is being made on improved options.• Why store electricity?

• Generation source transition support• Power quality correction• Grid integration of intermittent generation sources• Allows generation to be predictable, efficient, economical• Temporary backup for grid outages

#IRMI2018 32

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Battery Enhancements Continue

• In batteries, we estimate that lithium-ion pack prices fell by no less than 24% last year, opening up the prospect, with further cost improvements, of EVs undercutting conventional, internal combustion engine cars on both lifetime and upfront cost by the mid-to-late 2020s.

• Detailed analysis by our teams suggests that these cost reduction trends are set to remain in place in the years ahead, thanks to economies of scale and technological improvements – although no trend is a straight line, given the importance of the supply-demand balance and commodity prices.

Source: Bloomberg New Energy Finance

#IRMI2018 33

Utility Scale Battery Facilities?

• AES Energy Storage was selected by Southern California Edison to build a 100 MW battery facility near Los Angeles.

• It will be able to provide 4 hours or 400 megawatt-hours of battery-based energy storage.

• This facility will replace a gas-fired “peaker” plant which provides electricity during peak periods.

#IRMI2018 34

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Storage Options are Increasing• The Solid state batteries: A range of electrochemical storage solutions, including

advanced capacitors.• Flow batteries: Batteries in which the energy is stored directly in electrolyte solution

for longer cycle life and quick response times.• Flywheels: Mechanical devices that harness rotational energy to deliver

instantaneous electricity.• Compressed air energy storage: Using compressed air to create a potent energy

reserve.• Pumped hydro-power: Creating large-scale reservoirs of energy with water.• Hydrogen production: Production of hydrogen which can be burned as fuel.• Thermal storage: Storage of heat for later use in heating or producing electricity.

#IRMI2018 35

Risks of Renewable Energy Project Development• A classic risk challenge for utilities.• “Stick with the knitting” or go “All in”?• Renewable contracts present new challenges/opportunities.

Development riskTechnology riskPerformance riskOfftake/Counterparty riskObsolescence riskWeather riskPolitical/Regulatory/Tax riskCyber risk

• Contractual risk transfer is a key component for these projects.

#IRMI2018 36

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Renewable Energy and Natural Hazards• The proliferation of renewable energy projects has seen them

increasingly deployed in areas where natural hazards present a threat.

#IRMI2018 37

Managing Weather Volatility• The largest variable in solar and wind projects.• Plentiful weather data supports these placements.• Puts, Collars and Swaps can be employed for a given year around

actual power production.• Improving technology performance data means lower basis risk for

projects.• Parametric products can be employed.• Geographic spread of projects can help mitigate.

#IRMI2018 38

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Risk Innovations Support Renewable Projects

• Efficacy Insurance•Proxy Revenue Swap•Parametric Coverages•Weather Hedges•Maintenance Cost Caps

#IRMI2018 39

Thank You for Your

Kind Attention

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