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
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
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
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
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
Alternative Energy
Development
Insurers New product:
n Mechanical breakdown/Extended warranty
n Design/Serial defect
n Power curve 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
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
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
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
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
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
