Minimising hydro risk

The construction and operation of a hydro power production facility involves a wide variety of risk; some retained, some of which can be transferred by contract to other parties involved in the project, and some of which can be transferred to insurers. Financial and contractual risks such as labour and materials costs, the cost of borrowing, steady revenue generation, warranties, liquidated damages, and contractor/subcontractor failures, to name just a few, are most often either retained by the owner or transferred through the use of indemnity clauses in contract. The risks associated with the physical construction and operation of the facility – the ‘site’ risks – are usually transferred to an insurer.

Insurers play a vital role in the transfer and management of risk; removing uncertainty and ensuring that the project can be completed or the operations maintained in the event of an insured loss. It is the role of the insurer that will be explored here.

Risk transfer

The basic and fundamental purpose of insurance is the sharing of risk such that the losses of the few are spread amongst the many. As no one can, with certainty, predict when and where a loss will occur, it is prudent for the majority to arrange financial protection against losses of unknown frequency and magnitude by means of an insurance contract. The risk associated with these losses, which may prove financially crippling to an owner/operator or contractor, is therein transferred to the insurer for a known cost (a premium).

Insurance cover for loss in transit, damage, or breakdown is commonly provided on an ‘all risks’ basis; meaning that all losses are covered unless specifically excluded. As the needs of owners and contractors have evolved, the scope of insurance has widened and, contrary to popular belief, the number of exclusions in an ‘all risks’ policy is relatively small.

Some potential sources of loss on a hydro facility construction project include:

• Flood due to failure or over-topping of a cofferdam which may include, for example, resultant damage to concrete work and formwork of the dam or spillway or damage to turbines and generators as a result of water, mud, and gravel infiltration.

• Collapse of embankments, dams, weirs, tunnels, or penstocks as a result of earthquake, flood, storm, faulty design, faulty workmanship, or unforeseen ground conditions.

• Fire due to lightning strike, resulting from arcing during testing and commissioning, careless smoking, hot works (welding, cutting, etc.), or due to a forest fire in the vicinity of the works.

• Damage to equipment in transit as a result of vehicle collision, or resulting from mishandling during loading and unloading.

• Delayed revenue generation as a result of a delay in the project due to any of the above losses.

Many of the risks present during construction continue once a facility becomes operational. Some additional sources of loss that are present at an operational hydro facility include:

• Dam failure or penstock failure.

• Failure of turbine elements (blades, shaft, bearings, valves) by breakage, cracking or deforming of mechanical parts resulting from (but not limited to) water hammer, cavitation, entry of foreign materials through runners, alkali-aggregate reactivity, or stress corrosion cracking.

• Vibration, erosion, and corrosion.

• Failure of electrical equipment including, for example, generator stators, rotors, switches, transformers.

• Control system failure.

• Loss of revenue due to downtime resulting from any of the above losses.

Available protection

The following cover is available in respect of a hydro facility under construction or in operation.

• Transit/marine transit – cover for materials and equipment in temporary storage and transit to the hydro site from anywhere in the world.

• Marine delay in start-up – cover for loss of revenue arising from a delay in delivery following an insured transit loss.

• Contract works – cover for physical damage to the works during the project period, typically on an ‘all risks’ basis and often extended to include cover for damage to equipment as a result of breakdown during testing and commissioning operations.

• Advanced loss of profits/delay in start-up – cover for loss of revenue arising from a delay in completion of the project following an insured loss (damage).

• Operational property – cover for physical damage to the hydro facility once operational, typically on an ‘all risks’ basis.

• Equipment breakdown/machinery breakdown – cover for damage to equipment (including but not limited to turbines, generators, switch gear, transformers, control systems) during operation as a result of breakdown.

• Business interruption – cover for loss of revenue arising from downtime following insured damage or a breakdown loss.

• General/public/wrap-up liability – protecting the owner/operator and/or the contractor(s) for their legal liability resulting from injury to a third party or for damage to third party property during construction; and/or protecting the owner/operator for their legal liability resulting from injury to a third party or for damage to third party property during operation.

Risk management

This should be a key consideration for all parties involved in the construction and operation of a hydro power production facility. Insurers can assist owners/operators and contractors to manage their risk by providing comprehensive loss prevention assessment and consultation services.

In the early stages of a project this service may take the form of consultation and the provision of recommendations in respect of civil engineering designs, electrical and mechanical designs, and equipment selection.

During the construction, erection and testing/commissioning phase of a project loss, prevention engineers will attend the project site to undertake a survey of risks. At that time, they will provide the owner/operator and contractor(s) with a report detailing the project’s exposure to loss from perils, which include fire, flood, landslide, windstorm, and earthquake. If requested, insurers are also able to assist the insured by providing pre-commissioning inspections.

Once operational, the insurer will continue to conduct loss prevention assessments on an agreed and regular basis in partnership with the insured. Insurer led assessments are intended to supplement the loss prevention measures undertaken by owners/operators. It is expected that owners/operators will have in place a formal preventative maintenance programme to ensure that equipment is regularly maintained to manufacturer specifications. These programmes should ensure that internal investigations are carried out with the frequency and scope recommended by the manufacturer.

Insurer surveys should include a physical tour of the hydro facility, at which time general information about the operations can be gathered. Also, details about insured structures can be collected and details relating to the turbine(s), generator(s), other electrical equipment, and safety controls and protection can be collected and discussed with the operator. Risk management discussions will also encompass critical equipment and obsolete equipment or devices, if any.

During the construction phase and again when the hydro facility is operational, consideration should be given to the availability of original equipment manufacturer services and spare parts. Contingency plans should be discussed in the event that damage or breakdown occurs at the facility. A relatively small damage or breakdown loss could be the catalyst for substantial loss of revenue if parts have to be rebuilt or if replacement parts are not readily available. Owners and operators should ask themselves: ‘will our profits be affected if the facility experiences a four or five week shutdown because critical equipment or parts require repair or replacement?’ and, ‘what would the effect of a four or five month (or longer) shutdown be?’.

Even if parts are available and repairs could be expedited under normal conditions, there may be access issues to the site because of remoteness and/or seasonal weather conditions.

Partnering with risk professionals

There are several groups of insurance professionals that you can rely on for assistance when looking to manage your risk. An independent broker will work one-on-one with you to determine the most suitable insurance policy for your needs. With knowledge of insurance products from different companies, you can be sure a broker will advise you on your best choice for coverage and will provide you with advice on the benefits of selecting an insurer with both the experience and expertise to insure your hydro facility.

Brokers are not solely available to help with the arrangement of cover; many brokers provide risk management advice and consultation services and brokers will work for you, and with you, to ensure your project or business gets back up and running as quickly as possible should you experience a loss.

When selecting an insurer, it is important to partner with a company that has the experience and capability to handle your risk. Your insurer should have the necessary expertise to underwrite and manage hydro risks, and should employ specialized claims personnel knowledgeable in the handling of hydro facilities and equipment losses.

Geoffrey Carter, technical leader, Construction and Renewable Energy, RSA Canada. Email: geoffrey.carter@rsagroup.ca

RSA has been insuring hydro projects and hydro facilities around the world for more than 30 years. It has a global Small Hydro Centre of Excellence located in Canada