UK’s OFTO regime drives challenges in claims resolution

Contingent business interruption (CBI) claims in offshore wind are rising - both in frequency and financial impact. In the UK, the unique Offshore Transmission Owner (OFTO) regime is adding further complexity to these claims by separating ownership and operation of transmission assets from wind farm developers which can lead to differing objectives during an outage.

To unpack the causes, consequences, and market response, we spoke with Spencer Clark (SC), a Director at Lloyd Warwick loss adjusters, and James Mulligan (JM), a Senior Underwriter at GCube Insurance - offering perspectives from both ends of the claims and coverage spectrum.

How do OFTO regimes differ globally?

JM: There are three main OFTO models. The UK OFTO regime requires developers to build the transmission assets, then sell it to a third-party. In Europe, the grid operator often owns and manages the transmission system, which guarantees availability and reliability. A third model, used elsewhere, allows the wind farm owner to retain full ownership of the offshore transmission to the onshore connection point.

What are the core causes behind large CBI losses, and why do they appear to be concentrated in the UK?

SC: Offshore transmission assets, including export cables, have caused a number of CBI events, which are complicated by the OFTO regime in the UK. The OFTO buys the transmission assets from the wind farm developer and then becomes responsible for operating and maintaining this infrastructure.

However, since the OFTO does not receive revenue from the actual supply of electricity generated by the wind farm, it is not directly impacted by the potentially large financial losses flowing from a transmission asset outage. Consequently, the OFTO (and possibly their insurers) have less need to expedite repairs. The wind farm operator’s and the OFTO’s interests are not aligned – at least not in terms of urgency, which makes it difficult to resolve and often creates tension between the parties.

JM: The UK OFTO regime is undoubtedly a major factor. The structure limits the wind farm operator’s ability to control or influence repair efforts following an outage. In contrast, European setups typically ensure grid operators act more swiftly due to built-in guarantees and public service obligations. The UK's setup can lead to misalignment between parties during a loss event creating delays. The root causes don’t really differ by regime or geography, but the process and responsibility to repair when there is damage certainly do.

How have UK offshore CBI losses evolved in terms of frequency and severity over the past 18-24 months?

SC: Over the last couple of years, we have seen several offshore wind farm CBI losses, all of which had the potential to be very large claims, had mitigating factors not been implemented.

JM: As wind farms have grown in scale, each cable now carries significantly more power and therefore revenue. This means that while the trigger for a loss hasn’t changed (a cable being damaged in some way), the financial impact has grown sharply. CBI is now front of mind for many stakeholders in a way it hasn’t been previously.

It is inherently difficult to price and structure for CBI because the insured party does not own or manage the asset at risk. This lack of visibility and control makes it hard for underwriters to assess the quality and condition of the infrastructure.

To what extent is the current risk environment being influenced by increasing wind farm scale?

SC: Larger offshore wind farms with higher capacity wind turbine generators means more power generation, resulting in larger revenue losses in the event of a transmission asset problem. 

Where larger wind farms are in deeper waters and/or further away from the mainland, repairs may require more substantial vessels, which increases the challenges around availability and cost.   

The time of year when a transmission incident occurs also has a direct impact on how quickly it can be reinstated. For example, an outage in late summer will most likely become a planned repair in Q3 onwards. As we are all very aware, poor winter weather can cause delays and make repairs more difficult (or impossible), potentially delaying the campaign until the following spring. This is the worst-case scenario that insurers could face, as CBI losses will escalate significantly.

JM: Wind farms are increasing in size, and more electricity flows through single transmission points today. What we have seen in recent years is that whilst the power output of a wind farm has increased, the number of transmission assets for a wind farm hasn’t – for example many projects still build a single or two substations despite projects being multiple times larger in size.  This creates concentrated points of failure with significant financial exposure. A damaged cable today can represent a far greater daily revenue loss than it would have a decade ago. The increasing scale adds intensity to every CBI event.

What challenges do insureds face during these CBI events?

SC: The wind farm operator is not in the ‘driving seat’ for the physical damage causal investigations and repair planning, so is reliant upon decisions made by the OFTO. 

The availability and cost of specialist vessels, jointing teams and spare parts (both cable and joints) can vary greatly, and this will ultimately dictate the cost and duration of any repair. There can also be long lead times for any spare parts not held in storage. The specialist nature of cable jointing requires dedicated teams, and there can be discussions around OEM cable joints and jointing teams, versus universal joints and non-OEM jointers, with varying warranties being offered. 

JM: The biggest challenge is the wind farm operators’ inability to control the repair timeline or process. Unlike turbine maintenance, where the operator and/or owner makes the decisions, here they are dependent on a third-party OFTO whose priorities may differ.

For example, while the wind farm owner will likely want the fastest possible fix to minimise lost revenue, the OFTO and their insurers might prioritise a cheaper or longer-term solution which could mean a longer waiting period to have the issue resolved. Ultimately, the insured is left exposed despite having no control over the cause or resolution of the outage. As a result, there's wide variation in how insurers approach the risk and terms they’re willing to offer.

What solutions exist for insureds to better mitigate these risks?

SC: Currently there is not a ‘one-size-fits all’ solution, but there have been some suggestions discussed, including:

1. A governmental change in the UK to improve the transmission asset repair process for all parties involved – although this may be optimistic!

2. Wind farm operators to have some form of contractual agreement with the OFTO for repair of any sold transmission assets.

3.Consider a clear extra expense provision in the insurance policy to provide a facility for expediting repairs.

JM: Agreed. I also think an effective approach is to build strong relationships with the OFTO, whether formally through contracts or through informal collaboration. Operators who have open communications with their OFTO are far better positioned when an incident occurs. This collaboration can make the difference between a fast, coordinated repair and a fragmented, drawn-out process. Insurers can play a role here by encouraging this proactive engagement and alignment from the start. It should also be noted that in some instances an OFTO’s ability to respond may be limited by its own insurers highlighting that there is a real need for insurers to also form part of this collaboration.

What lessons should emerging offshore markets learn from the UK experience?

SC: Countries looking to create their own OFTO type regime could look at the traditional offshore oil and gas industry, which is a lot more mature. There are valuable lessons to be learned from this sector. Offshore wind CBI claims can be complex to adjust depending upon the nature of the wind farm, so simplifying how the parties involved interact and how the various electricity pricing mechanisms are structured would be a start.

JM: One key lesson is to avoid setting up structures where different parties could find themselves pulling in opposing directions. In the UK, the separation between wind farm operators and OFTOs can lead to misaligned incentives and delays in resolving outages. European grid operators often face direct financial consequences if performance guarantees aren’t met, which motivates faster repairs. Encouraging cooperation rather than fragmentation could greatly improve project resilience.

How can the insurance market work together more effectively to address contingent risks?

SC: Cooperation and transparency between the parties, and their insurers, during a claim is always beneficial. Clear policy language around what is, and what is not, covered assists, along with having any extra expense sub-limits set out.

Under the present arrangements, funds available to OFTOs are usually collected from their investors, which can take time to access depending upon the circumstances and level of supporting documentation required.

During the early fast-moving stages of a repair campaign planning process contractors can demand large deposits with relatively short payment timescales in order to secure a vessel and/or repair solution. So, if there was collaboration between the wind farm CBI insurers and the OFTO’s PD insurers this could provide a buffer to the OFTO’s potential cashflow challenge, assuming the desired outcome for the wind farm (and their insurers) is a faster repair. 

Any increased costs associated with a more expeditious repair would also need to be agreed between all the parties. And finally, assuming the CBI policy has a material damage proviso clause, then the wind farm ideally needs access to the OFTO’s RCA (root cause analysis) findings to confirm there is a suitable policy trigger in place. This becomes more relevant with ageing assets. 

JM: From my side, there’s growing recognition that collaboration between wind farm operators and OFTOs is vital to improving incident response. However, broader frameworks are needed to align all stakeholders.

A pre-agreed plan on repair priorities, timelines, and shared responsibilities could reduce uncertainty in the event of a CBI event. A sensible landing, that pulls all parties involved together, must be agreed upon.