Forced Outage Parametric Insurance Solutions for CCGTs

Combined cycle gas turbine (CCGT) power plants started appearing on a larger scale in the late 1990s and have since then been a very efficient supplier of baseload and lately peaking capacity to the power grids. The U.S. Energy Information Administration (EIA) recently reported that natural gas–fired capacity additions are increasing in the U.S. again for the second year in a row, with 10 plants coming online and another 6 expected to come online before the end of the year.

A large part of the installed fleet is now reaching an age of 20 years or more, close to the typical design life of 25 years. With the increasing amount of renewable energy coming online, existing combined cycle plants are often now required to cycle on a daily or weekly basis to cover the gaps in electricity supply that comes with renewable energy sources.

While natural catastrophe perils are the main concern for renewable assets, damage related to operation mode and equipment age are likely going to increase for the majority of the existing CCGTs over the next couple of years. In addition, newly installed peaking plants might see accelerated damage on major equipment.

A breakdown or failure of gas turbine, boiler, or steam turbine components can have catastrophic consequences and lead to million-dollar losses. If this would occur, would you be covered under your current insurance policy? In this article we’ll look at what is typically covered by insurance for a typical CCGT plant, what can be done to reduce the risk of having a failure being excluded from coverage, and what additional targeted coverages exist on the market today.

The Wear and Tear Issue

For a typical boiler and machinery (or all-risk property) policy to be triggered, the event leading up to the failure needs to be considered “sudden and accidental.” Exclusions from the policy typically include losses from wear and tear, corrosion, deterioration, leaks, malfunctioning of safety devices, etc. This would exclude losses from such things as thermal and mechanical fatigue, creep, flow-accelerated corrosion (FAC), and stress corrosion cracking in the policy. It would however typically not exclude secondary damage as a result of the event. Does that sound complicated? It is.

From an insurance perspective, wear and tear on its own is excluded in nearly every commercial property policy. If the proximate cause is wear and tear, which results in ensuing physical damage, many policies will pay for only the resultant/ensuing damage. While these catastrophic failures are often insurable, the hard property insurance market has driven retentions on both property damage and business interruption higher. This has incentivized many power generators to make every effort to reduce their exposure for forced outages. This is typically being accomplished by a more aggressive and more sophisticated planned inspection and maintenance schedule.

In addition, the last few years of inspection and maintenance records needs to be made available to insurers for review in order to improve your plant risk score. Your risk score then let’s the underwriter determine how big the premiums should be to cover property damage and business interruption. Unfortunately, recent trends show increasing cases with lack of communication between the inspection and risk management, which can lead to higher risk of failures and subsequent higher premiums.

Good Inspection and Maintenance Practices

Inspecting your key components might not be enough. Having a well-engineered inspection plan, either condition-based or risk-based, coherent with good industry practice in place, is critical and becomes more important the older the plant gets. Good guidelines can be found, for example, in ASME PCC 3, API 580, EPRI, IEEE, and other industry-recognized standards and guidelines. There must be a structured inspection plan in place, taking into account all possible damage modes and which inspection methods should be applied, to detect the damage at an early stage. The plan should be revised after every outage and re-evaluated regularly.

Having the original equipment manufacturer (OEM) completing inspections and maintenance through a long-term service agreement (LTSA) or contractual service agreement (CSA), especially for the gas turbine, has, in general, been viewed favorably in the eyes of insurers. Even so, reviewing inspection reports in detail should be part of plant common practice and not neglected.

Using third-party experts for the boiler, steam turbine, cooling towers, air-cooled condensers, transformers, and other balance-of-plant (BOP) equipment is more common and can be considered good practice. If inspections are done in-house, then these should be complemented with third-party inspections every three to five years. Companies providing the service should be leaders within their field and provide independent advice. Repair work should be done by a company not affiliated with the inspection company. The service you pay for should not be linked to any additional service to assure independent advice is received.

A Case Study

Let’s dive into the nitty gritty of a fictive power station and see how the asset management strategy might affect policies and premiums over the lifetime of the plant. Let’s assume for simplicity that this is a 2x2x1 CCGT configuration (two gas turbines, two heat recovery steam generators [HRSGs], and one steam turbine), totaling 1,000 MW with a total insured value (TIV) of $1 billion. In our scenario, the total premium is $4 million per year, covering losses up to $250 million. Let’s assume a deductible of $2 million and an indemnity period of 60 days. This basically means that damage less than $2 million is not covered by insurance and business interruption is only covered after 60 days of downtime.

Assuming nothing happens, the plant will pay $100 million in insurance premiums over its intended 25-year lifetime. Following the typical “bathtub curve” for maintenance, one can assume increased focus on the plant’s inspection and maintenance regimes the first 1/3 and last 1/3 of the plant intended lifetime. Let’s look at some specific cases for this plant, evaluate if they would be covered or not, and consider how they would affect insurance premiums. Consider the following:

• A catastrophic failure of either the gas or steam turbine is likely to cause property damage in the range of $25 million to $100 million (depending on the size of the turbine) and is covered in most cases. However, as mentioned before, if the root cause of a failure is wear and tear, the claim becomes more complex as damage caused by this is not covered but resulting damage typically is. As an example, a thermal fatigue failure of a turbine blade would not be covered by insurance, but secondary damage to other blades and surrounding equipment would likely be covered.
• A tube failure in the HRSG is not likely to cost more than the deductible, in our case $2 million, and thus repair and replacement costs would not be covered by the policy. Tube repairs are typically relatively quick to do (from a few hours to a couple of days), and it is unlikely that the plant would run on a reduced capacity for more than 60 days. Hence, loss of income would not be covered by the insurers either. In essence, high-frequency failures with lower repair costs and shorter downtime are not covered by the insurance policy. This is instead a direct cost to the plant owner or operator, pending how the contract is set up.
• A creep failure at the high-energy piping section of the plant would fall under the wear and tear paragraph and hence would not be covered. It is unlikely that there is substantial secondary damage, but this would be covered if it was the case. Having a failure at any location of a high-energy piping section would cause the plant to have to thoroughly inspect all weld seams between the HRSG and steam turbine to assure its integrity, hence the downtime is likely to extend much longer than the actual repair period. Again, this would be a direct cost for the owner or operator.
• A sudden explosion and fire of the main power transformer could potentially be a complicated claim. Dissolved gas analysis (DGA), furan analysis, and physical-chemical diagnostic testing are good tools that most plants apply in order to track degradation of insulation and overall condition of the transformer. Hence, a sudden failure could be claimed to be under the wear and tear paragraph if proof of material degradation exists in the inspection records. Assuming that this is the case in our scenario, it would have a significant negative effect on the plant’s overall risk score. Having inspection records that show it’s time to be proactive, and not complying with this, will put all the maintenance practices of the plant into question. That said, secondary damage would be covered and loss of income would very likely extend more than 60 days and hence also be covered.
• Damage caused by freezing is typically excluded, that is, not covered by the insurance policy either.

Are there cases where insurers choose to walk away from a client due to repetitive failures? Yes. Frequent failures in any area of the plant will affect the overall risk score of the power station. Even if not covered by insurers, it will be seen as an indication that the probability that things could go wrong on a larger scale is higher, and to cover the increased exposure the insurer could ask for either higher premiums, increased deductibles, or simply at some point choose not to renew the policy. This would put the plant in a difficult situation, as most plants cannot run without 100% insurance cover either due to national requirements or as a direct requirement from the lender. To conclude this section, all failures, covered or not, affect the overall risk score of the plant, and over time, the premiums and overall cost.

Forced Outage Insurance: An Additional Risk Transfer Tool

Parametric insurance solutions for forced outages exist and have been implemented at various assets in the U.S. to counter power price volatility risk exposures in high price environments. As power generating facilities often make commitments in the future power markets, they are at risk of failing to meet promised revenue or exposed to liquidated damages for failing to supply power. Forced outage and capacity performance insurance offers tailored, customized solutions to both owners and operators to tackle this risk. These solutions help better manage the financial impacts of replacement power costs, liquidated damages, hedged pricing and/or lost revenue associated with unplanned outages, and emergency actions and scarcity conditions for capacity performance events (Figure 1).

By analyzing a power station’s historical outage events, various insurance structures can be created to transfer this pricing risk from the owner/operator to insurers. This is done by looking at four key components in detail, which are:

• Historical frequency of events
• Duration of each event
• Historical real-time prices
• Severity of each event in MW

These components can then be compared to other operating units the client may have or general industry performance. By using this additional risk-transfer tool, owners and operators can further reduce the financial risks associated with unplanned outages. In conjunction with adherence to best industry practices for inspection and maintenance, a robust additional financial cover can be implemented.

Although the American insurance market has led the way, in Europe there’s still only a few insurers that possess this level of technical expertise and have the appetite for this type of risk. As a result, the capacity available on the insurance market remains limited for this type of cover, as the implementation of such policies requires a long phase of risk analysis and assessment, and a great deal of data.

—Andreas Fabricius is a senior risk control consultant with Aon Global Risk Consulting Services (AGRC) Natural Resources for the Europe, Middle East, and Africa (EMEA) region; Michael DeLio is an account executive with Aon Global Power & Renewables’ U.S. division; and Aurélien Schwachtgen is director of Client Solutions with AGRC EMEA.