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Allen and Joel speak with Jatin Sharma from NARDAC, an insurance broker specializing in complex renewable projects. As a boutique firm, NARDAC aims to bridge knowledge gaps between insurance capital providers and renewable companies to facilitate optimal coverage terms amidst the market’s rapid evolution and emerging risks. Visit https://nardac.com/ for more!
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Allen Hall: Welcome to the special edition of the Uptime Wind Energy Podcast. I’m your host, Allen Hall, and I’m here with my co host, Joel Saxum. Our guest today is Jatin Sharma, a managing partner at NARDAC. NARDAC is an independent wholesale broker, which navigates the relationship between insurance carriers and retail brokers.
And as the turbulent as the insurance market is at the moment, NARDAC may be your key to getting there. Success weathering the insurance storm. NARNAC is a specialist for large, complex projects that includes a focus on renewable energy. Whether you’re an original equipment manufacturer, a developer building a wind farm, or an asset owner, NARNAC helps the industry understand the risks.
Jatin, welcome to the program.
Jatin Sharma: Thanks for having me.
Joel Saxum: So Allen and I of course in the lightning world and wind and with the podcast and the networks that we have, we talk to people about failures and fires and gearboxes and all these different things. Do you see the like macro changes, right? So I say this because I’ve talked with people in the insurance world or in the, on the risk world on the IPP side that say, yeah, our premium is going up on this site.
Or our deductibles are starting to increase here for this reason. And to me, it seems like that’s more of a, like a micro okay, that’s specific to this project, this technology, this site, mostly it’s this site but with better communication strategies in a more I would say a more integrated insurance market.
Do you see the premiums or the deductibles starting to change? And let’s just, it’s for ease of use. Let’s focus on like the U S onshore market.
Jatin Sharma: If we did like a. a three to five year time horizon with today versus, three to five years ago. I’d say that we’ve probably seen an increase of about 40 percent on the price paid per megawatt for wind operators in the US.
And that, that would be my kind of average number, across a portfolio and that’s on a risk adjusted basis. And you might say, wow, 40%, that’s a lot. That’s pretty material. What does that do to your OPEX? What does that do to valuations? I think it’s important to put it in context that insurance is directly linked to the cost of capital.
So in the same way that, five years ago, if you told me you had a million dollars and you’re going to put it in the bank account, you probably got to get a quarter percent interest, maybe half a percent, on lowest risk opportunity. Now you go and put it in, maybe you can get 5. 5%. In the same way, insurance will have turned around and said if five years ago, for every 100 you were giving me, and I was giving you back 55 to 65 in claims, payments, let’s say loose numbers here, that is no longer an acceptable return, I want to be giving you, I want to be getting 150 and I want to, not give back more than 50 to 75.
Fives. In that sort of ratio and it’s the law of large numbers. So there are many sites that have zero claims and every now and again, you have a catastrophic fire and that one fire is enough to wipe out the entire premium base of Vermont wind farms. So just you know, there is that kind of proportionality behind it.
Joel Saxum: There has been some of those large I mean on the solar side too that one in texas 100 million dollar losses and stuff and those things in my mind I guess of course i’m not an insurance professional But have to shake the foundation of what that insurance Looks like as well because natural catastrophes in the united states.
We don’t see this as much or understand this in a general sense as a u. s citizen because You We’re used, we grow up seeing tornadoes and floods and fires and stuff on the news all the time. But to be honest with you, the extreme weather in like the central part of the United States whether it’s hail, lightning, tornadoes, these kind of things, it’s not as common in the rest of the world.
So natural catastrophe is a little bit more extreme here sometimes.
Jatin Sharma: I would argue that the wind side is more robust in terms of technology and how it’s fed. And so the wind industry needs to be treated differently from. Other technologies that are potentially more susceptible based on how the technology has been built.
So we do tend to push back a little bit when insurers try to tar wind with the same brush as solar and other technologies. But yeah, look, fundamentally this is first world country, third world weather, somebody once said to me, and the challenge is that If you look at the trifecta of how developers want to use their investment dollars, they want the best power purchase agreement per megawatt hour that they can get they want the best p90 value that they can get So great resource And they want to spend the lowest cost per megawatt, so that’s your trifecta by that token, it’s great to get into the japanese market or it’s great to get into You know the puerto rico market for solar and if you look at the u.
s. Yeah, okay I could probably get into texas and build new wind farms My cost per megawatt is going to be very competitive. I can build it cheaply You the resource is pretty good for the most part with wind speed studies, my ppa is not going to be great compared to others.
Maybe I can get a hedge. Maybe I can get some corporate ppa money and so they’ll look at it that way and I think the economics of renewables and the sites that have had bigger claims you know you get what you pay for if you buy land That’s very cheap and are able to build it a very large project You know, there’s a reason why you couldn’t do that in PJM.
There’s a reason you couldn’t do that in,
parts of Utah. And some of the areas that are fairly benign, there’s plenty of space to build those projects, but is there enough demand at the node, in that particular location for a big mega projects and is there going to be enough return on investment?
So those are some of the factors that come into play.
Joel Saxum: That’s an interesting concept to me as well, because now we’re looking at offshore wind in the U S. And offshore wind in the U. S. I would imagine that the models that are based on things to happen aren’t as developed because there hasn’t really been, say, East Coast, U.
S., there hasn’t been an actual, a civil development offshore. Are those things, is that uncharted waters or do you guys have a pretty good handle on that? What’s going to happen out there for natural catastrophes.
Jatin Sharma: I remember being at an offshore wind conference in Tyson’s corner, maybe back in 2010, and it was full of a bunch of CEOs and I had to give a small presentation about why European windstorm risk versus U S hurricane risk, the two do not necessarily compute with the added exposure that you’re getting here.
And many of these developers were looking at that kind of Boswash location. So Boston to Washington, in terms of development. And one of them said to me, Oh, you just don’t know what you’re talking about. Hurricanes don’t go up that far. They don’t do this. Superstorm Sandy was probably the next year or Yeah, the Jersey’s, yeah, just beat the hell out of it.
Yeah. So I think to, to some extent offshore wind has been pretty robust against major European wind storms. And there are some studies by third party consulting companies that have shown that. But it doesn’t mean that they’ve necessarily been tested in the same way to a category, two, three or higher from Virginia up to Maine.
And, the insurance industry gives them a level of coverage for those projects. But as soon as you have one big loss, the amount of coverage available for it becomes very limited. It’s not dissimilar to, the hail example you gave. Suddenly the market learns of a large loss in the ERCOT ISER and suddenly.
It’s no longer available on a commercial basis to get full value hail. So I think we’re playing this kind of game of chicken with natural catastrophe impacting a project.
Allen Hall: Yeah, a couple local codes, regulations, and even at the state level, there seems to be a lot of changes happening where some states just essentially outlawing renewable power.
projects altogether. You’ve had the problems on the East Coast for offshore wind with the state of New Jersey and the state of New York and some of the permitting. How does that play into the insurance market? How do they address those risks and what are they looking forward? What are some of the likely things to happen in the next couple of years there?
Jatin Sharma: I should probably say that insurance is really there to cover the projects against a sudden unforeseen risk. So fortuitous Typically, it doesn’t look at enterprise risk, so a developer failing to get a project to go ahead because of part of the stakeholders at government level basically saying you can’t build if a claim is exacerbated by government ordinance, yeah, insurance will come in to do that, but the project should already be in construction or it should be operating.
We’ve typically seen claims inflation happen. When there’s been like, for example, an offshore wind let’s say something goes wrong on the project. Vessels need to come in, intervene to repair something but there are environmental restrictions around. You can’t do any construction during this period because it’s sensitive to, local duck mating season, or whatever it might be.
We do see that but yeah, insurance is really there. To say, Hey, who’s taking investment risk on this project that’s ready to, it’s shovel ready. Who’s taking investment risk on this project that’s now operating, what sort of things keep you up at night? Oh, if the transformer blows up, if we lose a number of turbines for a national catastrophe.
If the battery storage unit goes out, like those are the things that insurance is really bad to get involved.
Joel Saxum: To sister onto that. Does it affect the capacity coming from the global markets? So like the capacity that you guys get to deploy coming from Zurich and coming from, different places in the world, what are those companies watching what’s happening politically elsewhere and saying, you know what?
We were gonna, we were gonna, put 400 million into the pool to, to give into this and write some percentages on it. But, now we’re just going to turn ourselves elsewhere or is that capital still there and available in lieu of these permitting issues?
Jatin Sharma: Insurers love a good silo and, offshore onshore are distinct silos and they carry different term horizons as well.
So if you look at an offshore wind project. Realizing the construction to COD of one of those could be a three to five year period depending on its size. That will be one particular division that will probably look at that sort of, what’s my cost of capital? What’s the term?
Where is it going to be based? How much exposure are we going to take? I think where it’s been problematic is a number of developers recently, giving signals that they’re pulling back in deploying, CapEx for certain projects. Meanwhile, the insurers have said we just. spent all this money pulling out of oil and gas to now retrain some of our staff to focus on offshore wind.
What are they meant to do? Is there a role for them? And then reshuffling them internally. And we have seen that some companies have been ahead of the project life cycle and ahead of the potential growth only to find that there’s nothing for those people to do, because the projects haven’t materialized.
And US offshore, it’s one of those things that’s dragged out for many years. We’ve seen this kind of stop start from demonstration phase to now some utility projects potentially materializing. But it’s been a, unfortunately, it’s been a bit of a stop start.
Allen Hall: Is the insurance market going to get involved heavily in the battery long term storage market? It seems like even in ERCOT, there’s going to be a big shift there to install a lot of batteries over the next year. Is that market coming together?
Jatin Sharma: Yeah, so when we first launched the business in 2020, I thought we would be doing offshore wind all day, every day.
And actually You know, one in five deals we’ve done have been batteries, whether it’s been micro grids in, PJM, New York areas with more densely urbanized areas to large scale best projects in the middle of nowhere, between Arizona and California, parts of ERCOT with utility scale batteries.
And the insurance market has been fairly lukewarm on batteries because some of them have been on the more prominent claims You know, it’s hard for the actuaries to get their head around. What’s the loss projection on a new technology? What’s my 20 year claims history for this class of business?
How is it protected and it’s its own. It’s its own technology. It’s its own occupancy Technology becomes obsolete very quickly. So so all these questions Is led to limited underwriting appetite. And we spent the best part of three and a half years gradually educating, persuading underwriting capital, whether it was in the U S or London to really get involved in this space.
And we have our own product coming out in the end of April called flex which if you’re a battery geek, you know why we call it that. But it’s really designed. to provide dedicated capacity for many of these battery companies through their retail brokers with some specialist knowledge that can actually support them on battery deals, whether it’s micro grid or utility scale.
So again, that’s one of the beauties of being a boutique. You can identify and say, here’s clearly a gap of knowledge in the market, that we’ve understood based on a number of transactions and experience. How do we find a more efficient solution for our clients? to access that capital in a way that adds value for the end transaction.
And, we’re seeing so much growth, which is fantastic because the grid side is really slow to move. So to have battery deployment, if it’s done in a sustainable way, I think is really positive.
Joel Saxum: So Jatin we’ve touched on a lot of topics here and appreciate the fact that you’re so sharp on all of them and just rattle off answers to our questions, which is great.
But one of the things that we’re seeing again, I’m talking from the lightning space, right? So there we’ve had in the United States, 09 to 2012, there was GE 1. 5s were the flavor of the day and they got installed everywhere, right? There’s tons of them. Those turbines are, 37 to 40 meter blades and 80 meter tower heights.
So mostly, so you’re, 120 meters ish height, but now we’re getting to these. Three, four, five megawatts, the, like the Vestas V150 and The SGRE platforms and they’re reaching really high. And we’re starting to see a lot more lightning damage to some of these.
And it’s based on, some of it’s just based on physics, right? You’re low cloud base is lower. You’re up closer to them. Things happen. But what does these bigger machines look like for the risk appetite on your side?
Jatin Sharma: Insurers are usually quite nervous about underwriting innovation, even if it’s not a revolution, but it’s an evolution.
So increasing a blade length. We don’t actually know what the impact of that blade length increase is going to have on the gearbox performance. And in some of the early models that, I’ve been involved in, where they did jump up to a three and a half megawatt unit on a certain OEM platform.
Suddenly there’s a bunch of mechanical electrical breakdown claims, resulting from enhanced torque effect in, inside the nacelle. Again, we’ve got PhDs and claims professionals on my team, and they can speak at much greater length to this, but, underwriters will be cautious that whilst the developer may get a bigger windswept area and ultimately, pi r squared, they can get more return on their investment.
They’ll be looking at it and saying I’ve got new technology risk. I’ve got something that when it goes wrong, I don’t have a lot of have a high lead replacement time. It’s not like these blades are just manufactured in the same level as for a 90 meter roto with 45 meter blades.
There’s going to be an element of longer lead replacement times. The cost of that with any available crane that can handle that sort of height is going to be much longer. So potentially a higher downtime. And because the expected revenue is such a higher wind swept areas, greater, Then that’s an even more enhanced downtime.
So I think the smaller, older units have actually been pretty good performers. For a lot of our companies, we’re seeing a number of clients now enter the repower space, choosing to just leave things as they are and make small tweaks and then get into the 80, 20 PCC repowering campaign.
But the larger units, there is a certain amount of trepidation from insurers. And again, with the value of the turbine now being three to four times higher than the original 1. 5s to 2s that we’re talking about, they’ve said our deductible should go up in proportion to that.
We’re not going to give 100, 000 deductible like we did on those units. We want to be looking at 250, 000 to 500, 000. And it’s okay, the margin for error then is pretty, pretty small for the developers who are taking that on their balance sheet.
Joel Saxum: Yeah, it makes, that all makes sense.
We always go by the simple rule of a million dollars a megawatt, right? So if you had a GE 1. 5 and that whole turbine came down, generally 1. 5 at the cost that’s not cranes and all this other stuff. But now if you had the same kind, it can be the same event, right? It can be a blade failure caused by X, Y, Z, you name it.
A blade failure swings down, hits the tower, takes the turbine down. Now, if you have that same exact thing happen on a four or five megawatt platform. That turbine is not a million and a half, it’s 5 million. So the risk is in proportion.
Jatin Sharma: And that’s based on economies of scale too, because most people will sign a turbine supply agreement and let’s say they do a 300 megawatt projects and the turbine supply agreement averages out at 1.
2 million per megawatt, roughly on a new project. But if you have a single turbine loss, I’m sure it’s going to cost more like two and a half million per megawatt to replace it just based on, The cost of turbine versus the cost of procuring, the 100 that you did for the site and the lack of economies of scale.
Plus, unless you’re a developer that’s ordering 20 more of these for 20 more projects, it’s hard to get to the top of the order book with some of the OEMs cause they’re signing up to three or four large customers. And that’s, what’s really driving it. So yeah, force majeure events like that do happen.
And. Replacing those units is very time consuming.
Allen Hall: Does the Sunzea projects and things of that scale with new turbines, new place, massive areas, new transmission lines, does that throw some unknowns into the otherwise relatively simple calculations on what rates should be and how insurance should approach it?
Jatin Sharma: Coverage pricing, for the technical space like operational wind or construction of these projects, it’s no different from you sitting down and, negotiating your life insurance with a carrier. They’ll ask you, what’s your age? Do you smoke? What’s your diet?
There’s all these kind of basic things. And in the same way, if you’re doing a 600 megawatt project or a thousand megawatt project, where is it? First thing we’re going to do is look at the natural catastrophe exposure. And there’s a huge difference between being in Brazoria County and Versus being in, Nevada.
And the amount of aggregate exposure the insurers have for some of these projects in the middle of nowhere is very different to if you’re doing a project, close to a large baseload center, near a major metropolitan area where insurers already got a lot of aggregate exposure.
Then it comes down to who’s your contractor? If it’s construction, there’s going to be all these kind of qualitative questions about who’s the EPC. Who’s doing the project management coordination? Who are the suppliers? What do we know about their failure rates? When it goes operational, is there one transformer, are there multiple transformers?
How much redundancy is there? And then, once you go through those, I don’t know, 26 independent variables you ultimately come up with a price, benchmarking basis, if you’re facetious, you can say I could have reversed engineered that number and it’s within, megawatt, or whatever it might be.
But I think there is a kind of science behind it. And many people who’ve done this job and have done it profitably for their carriers, they’re quite high in demand right now because many people try and get into renewable energy insurance. But not many people have done it for long enough where they can actually say, I had a profitable book of business and this is how I did it.
And many of those people have had to adapt to equipment going from onshore to offshore or from fixed bottom to floating or from solar PV on the west coast and east coast moving into the inland of the country. So there’s a science behind it. And I think, those quantitative and qualitative variables.
are ultimately what helps you drive the price and coverage on those sort of deals.
Joel Saxum: A lot of the, or the majority of the carriers, the underwriters, the capacity coming in, and even the brokers, they don’t have subject matter experts on board. They may have a couple of risk engineers that are there, and, But much like a lot of other engineers in the renewable energy space, they’re being tasked with stuff that they, it’s too much, right?
You have, I know of companies that, they’re writing policies left and right, however, they only have one risk engineer and they’re responsible for battery storage and solar and wind and all these different things. And so to me, that’s a big problem in the industry because the majority of things that are happening on a financial level and not necessarily on the engineering level.
Okay. There are a few companies that do the engineering side of things. Great. FM global being one of them, right? They put out their little sheets and all these different things. They have a lot of insights. So that’s one of the differences that I see of you guys at Nardac right now, but having this conversation with you, I’ve talked with.
With Robert Bates and I’ve talked with Dr. Tom before and gleaned some things from them. Smart people on your team. And I think that’s what sets you guys apart in the industry.
Jatin Sharma: I think we, we try and start with the end in mind, so when we come in, I described it as a relief picture, many of the retail broker clients that we work with that are supporting developers, IPPs, utilities, they have their own in house experts and we try not to take anything away from that.
We try and build on it and enhance it. With access to alternative capital providers that may,
want to support those projects because that’s part of their growth focus. Everything’s become so commoditized that actually one of the reasons I enjoy working in the insurance industry, I’m one of the few people that went from school straight to insurance after after finishing my undergrad degree and then kept working in insurance during grad school and business school.
Is that it is, it’s a relationship business built on kind of expertise, negotiation, persuasion, and trust. And if you send out your IPP’s portfolio to 50 insurers and just think you’re going to get the optimum result, you’re actually just going to waste, 46 insurers times.
It’s a much more slow burn and it involves inviting people to your site. It involves meeting the head of O and M and the developers that do this. Sometimes they’ll have a professional buyer of insurance in house. And other times it’ll just be the CFO general counsel or head of asset management, but it’s just a much more informed buyer.
And so they bring insurers along in the process. And it’s marrying up the specialist expertise that they have in house with getting in front of insurers, creating a relationship, Where there’s buy in to what they’re doing and why they’re doing it.
So then when they do go and buy a five megawatt platform, or they do decide to do a Frankenstein repowering campaign whatever it might be.
There is buy in into what they’re doing. And it’s meant in an authentic, genuine way. If the wind developers listening to this aren’t all in Disneyland with us during RE plus in September. They’re doing something wrong, cause that’s where you need to be building your relationship and ultimately getting buy in for what the company’s doing.
Allen Hall: Jatin if people want to go visit Disneyland, this is fall and meet with you. How do they do it? How do they connect with you?
Jatin Sharma: Yeah, look we’re on nardac.com has all the contact information of the different partners. You can email us, we have a LinkedIn page you can message us on LinkedIn as well.
Okay. Yeah don’t be shy. If we can support you and your retail insurance broker or any transactions, we’d love to help.
Allen Hall: If you’re an operator, owner, or developer out there looking for help in the insurance marketplace Nordic is the place to reach out to. So Jatin thank you so much for being on the program.
Jatin Sharma: Thank you.
