Offshore Wind in the UK

The insurance market is well-placed to support the UK’s ambitious plans for the development of offshore wind and there continues to be strong appetite to invest in this class of business. However, there will be challenges for the insurance industry to overcome to maintain its crucial role in helping the UK achieve its demanding targets.

Current state of play

Offshore wind is one of the UK’s biggest assets in the renewables industry and plays a central role in its transition away from fossil fuels. The UK is a global leader in offshore wind, in part due to the natural resources of shallow seabeds and high winds around the UK’s shores, and this includes floating wind – with the world’s first floating wind farm off the coast of Aberdeenshire.

The recent introduction of the Energy Act 2023 is a significant step in the UK government’s plans for offshore wind development. This landmark piece of legislation received Royal Assent on 26 October 2023. The scope of the Energy Act and the policy areas it covers are wide-ranging. According to a press release issued by the Department for Energy Security and Net Zero, the Energy Act is designed to strengthen energy security, make UK energy more affordable and independent, and help deliver on net zero commitments. The Energy Act and the policy papers leading up to it¹ make clear the significance of offshore wind in delivering on these net zero commitments.

Future targets

The UK’s ambition is to rapidly develop offshore wind to deliver up to 50GW by 2030, including up to 5GW from floating wind, which would amount to half of all renewable energy generation. For perspective, the UK currently has approximately 14GW of offshore wind fully commissioned, so this would mean generating over 3.5 times the current capacity in 7 years.

A key requirement in achieving this target will be reducing the process time of development and deployment. This means reducing the consent times for new projects from up to four years to one year, and taking environmental considerations at a strategic level to reduce delays to projects. The acceleration of development will need to be balanced with protecting the marine environment. This is addressed by four measures in the Energy Act relating to environmental compensation and the establishment of a marine recovery fund.

Growth opportunities and challenges

The government’s targets will require a rapid increase in the number and size of wind farm projects, which in turn will require sufficient capacity in the insurance market. This development presents exciting growth opportunities for insurers backing this form of energy transition.

However, whilst the long-term growth opportunities are attractive, there has been an increase in the frequency and severity of offshore wind claims over the last ten years, with an average claim increasing from GBP1 million to GBP7 million in that time. There are a number of reasons for this significant increase. Technological developments and commercial drivers pushing for greater generation capacity mean ever-increasing turbine sizes, with heights currently reaching 260m in total, and blades of 107m in length.

Among other issues, this can lead to more claims during construction due to the difficulties of transporting, harbouring and lifting larger components. New, unproven technology can also result in more defects. In addition, cables are becoming longer and more complex, leading to more costly cable malfunctions, including serial defects.

The costs of repairs and reinstatement are also increasing. This is in part due to significant rises in commodity prices and inflation, coupled with supply chain capacity and disruption issues. These challenging economics have affected market players, with the share prices of leading wind power suppliers dropping, and the latest round in the UK Contracts for Difference auction receiving no bids for offshore wind. Rising energy prices have also led to increased business interruption claims, as have supply chain bottlenecks leading to delays in projects returning to operation after a loss. The shortage of appropriate vessels can also mean increased delays.

The way forward

Against this backdrop of increasing losses, the fact that offshore wind remains a growth opportunity means there is incoming underwriting capacity, which can lead to additional competition on premium rates and underwriters agreeing to increasingly broader policy terms.

Underwriters will need to manage the risks associated with prototypical technology, greater supply chain risk and larger and more complex exposures generally in the short to medium term, to reap the benefits of a sector which has projected long-term growth, fulfilling a crucial role in supporting the UK’s energy transition through offshore wind.

¹See: British Energy Security Strategy (April 2022), Net Zero Strategy: Build Back Greener (October 2021) and Ten Point Plan for a Green Industrial Revolution (November 2020)