With perennial discussions around tightening generation margins, the government’s latest capacity auction is designed to quiet these headlines with firms bidding for subsidies to provide back-up power to the grid when demand is greatest.
The intent is for these stand-by plants to run for only a few days a year when the need is greatest, with much of the power likely to come from old coal and gas plants nearing retirement. But what is being dubbed as a ‘power insurance policy’ has the potential to have real implications for the insurance market providing physical damage and business interruption coverage to this ageing fleet.
In addition to the increased risks of operating and insuring plants that are approaching their end of life (which these subsidies are likely to attract), coal plants are not designed to operate under the peaking conditions required by the capacity auction. Depending on technology, coal plants take between seven and 15 hours to cold start when offline for greater than 48 hours.
The UK’s combined cycle gas turbine (CCGT) fleet has similar response times under cold start conditions. The CCGT’s built in the 1990’s were built to maximise efficiency rather than flexibility and as such demonstrate very similar characteristics to traditional coal plants.
In view the proposed stand-by plants are to operate for only a few days a year it is questionable whether these older plants could react responsively enough to answer demand during peak times, unless these times are known well in advance or short cuts are taken in the start-up procedures. Heating these plants too quickly can cause a myriad of problems including the cracking and failure of components due to thermal stress.
Even where correct start up procedures are followed, coal plants operating in two-shifting or peaking cycles are often prone to suffer wear and tear, fatigue, creep and corrosion of boiler tubes, turbine valves, casing and rotors. This in turn can lead to air heater corrosion and leakage, lower efficiency, increased costs and higher emissions. This presents a bleak picture for insurers, with property damage and business interruption losses likely to become both more frequent and more costly as a result of such operation.
The knock-on effect for the plants themselves will be increased premiums, higher deductibles, and more limited coverage where insurers feel losses are becoming inevitable due to the operating regime.
The question then follows, how can those bidding in this latest capacity auction mitigate such operational risks, ensuring plant availability whilst also limiting any negative knock-on effects to their insurance programme?
The key to this is maintenance. Tailoring the predictive and preventative maintenance schedule to the new operating conditions is crucial, and any prudent operator will of course update their practises as required. Upgrades to the burners, firing system and operating processes and procedures can be implemented to reduce the detrimental effects that operating in a peaking cycle can have on these plants.
What then becomes important is articulating this to insurers. A good broker should have a thorough technical understanding of the difficulties these plants can face, and an appreciation of the steps required to mitigate these problems. In-house engineering resource is indispensable in order for the broker to be able to advocate on the plants behalf and secure the best possible coverage insurance coverage solutions.
For more information, contact Sarah Pinks, Power team on +44 20 7466 6674 or email firstname.lastname@example.org