Insurance a better alternative to power purchase agreements

Asset protection covers would be appropriate for power plants set up in areas with extreme weather. [File, Standard]

Kenya, lying on the tropics, has economically significant green energy sources. The main renewable sources of energy in Kenya are geothermal, wind, solar and hydropower. The Energy Act (No 1 of 2019), among other policy and regulatory developments, aims to achieve the government’s target of increasing the proportion of installed capacity of green energy to 60 per cent by 2037.

The renewable energy sector has attracted a significant number of investors. These range from small-scale renewable energy solutions to private equity firms setting up plants to feed into the national grid. The development of green energy power plants is sometimes costly and take many years.

Take, for example, the Lake Turkana Wind Power Project, which required in excess of Sh80 billion to set up and seven years to complete. As a result, investors require some form of guarantee on their investment. The government has provided this through effecting long-term power purchase agreements between independent power producers and Kenya Power through the Feed In Tariff Policy (2012) issued by the Ministry of Energy.

With the increase in power costs, these contracts have been the subject of controversy, culminating in the appointment of the Presidential Taskforce on the Review of Power Purchase Agreements in March 2021. These contracts may turn out to be expensive mainly because of the take or pay clause – pay for generated power whether it reaches final consumer or not.

An alternative for green energy independent power investors is to take an insurance cover. Insurance companies can provide exploration, asset and revenue cover to private and public investors in the energy sector. The exploration cover would be apt for geothermal drilling whereas the asset and revenue cover for wind and solar power plants when solar/wind is below agreed speed and intensity thresholds.

To provide these kinds of cover, insurers can adopt parametric insurance solutions. The main environmental factors that affect the power production – wind, solar, water levels – are fairly predictable. Historical data on weather phenomena are available at the Kenya Meteorological Department.

Take, for instance, the generation of wind energy. Wind turbines require a threshold wind speed to turn and generate power. Investors will have no revenue if speeds are below threshold. The insurer and power producer will then agree on the minimum wind speeds required for consistent power generation. Independent wind speed verification can be done through satellite data. Using a monthly wind speed index, compensation for lost revenue will be triggered when the average monthly wind speeds are below threshold. This provides cover against downside risk and some financial security to potential and existing investors.

Wind turbines are also designed to cease spinning, and thus generate no electricity, at gale wind speeds to prevent damage to the rotors. This insurance can also be extended to provide revenue replacement for such instances. This form of insurance has been applied in agricultural insurance.

Asset protection covers would be appropriate for power plants set up in areas with extreme weather. Cost of rebuilding due to destruction of equipment by gale winds, floods and hurricanes can be provided by the insurance contract.

With climate change, losses from adverse weather are expected to rise and investors may be more inclined to purchase these covers.

Pioneering work on disaster covers has been carried out by the Africa Union through the establishment of African Risk Capacity (ARC) in 2015. ARC has cumulatively paid out $64 million (Sh7.3 billion) to over 2.1 million communities affected by drought. It provides $600 million (Sh68.5 billion) worth of cover across the 35 member States.