Obsolescence in renewable energy sector
By Rushton International, August 12th 2020
When completing an insurance valuation, the valuer needs to be mindful of betterment when valuing old or obsolete plant and equipment. Although renewable energy assets are relatively new compared with traditional energy assets, obsolescence is becoming more of an issue as the sector matures.
Obsolescence can occur due to technical or functional reasons. Technical obsolescence occurs when a new asset has been created to replace an older one and it is technically superior. Functional obsolescence is the reduction of the asset’s usefulness because of an outdated design feature that cannot easily be changed.
Wind farms in the UK and Ireland have been operational since the mid-1990s. Most farms were commissioned with utility style turbines that cannot easily be replaced. For example, 1.3MW turbines (utility standard) are no longer commercially available. Consideration needs to be given to the nearest modern substitute without allowing for betterment.
This is an issue that we would consider when completing a replacement cost assessment on wind farms. We recently valued a number of onshore and offshore farms where the turbines were no longer commercially available. Another point to consider is functional replacement cost v reinstatement cost. Functional replacement cost represents the cost of acquiring another item of property that will perform the same function and looks at the asset replacement of the total wind farm. Reinstatement cost represents the identical asset replacement on an individual turbine basis.
If older turbines cannot be sourced with identical MW output, then should the farm be valued on a functional replacement cost basis or should the modern equivalent turbine (could be higher MW capacity) be used and the cost base reduced for betterment?
Using the above turbine as an example, a wind farm with an output of 29.9MW across 23 turbines could be based on a 2MW nearest replacement at EUR 2M discounted for betterment to EUR 1.6M to represent 1.3MW. However, when considering the functional replacement cost for the total wind farm, by replacing the 23 x 1.3MW wind turbines with 15 x 2MW wind turbines, this results in a decrease in value of approx. 15-20%. Even further economies of scale are possible when configured against higher capacity turbines.
We have also seen wind farms insured where indirect and direct costs are excluded from the current sums insured. Often these costs are not recorded in the original cost information for the project and for this reason they are not captured when insurance cover is initially arranged. As a percentage of the total these costs are approximately 10% for insurance purposes however omission of the costs would result in underinsurance.
Rushton International completes desktop valuations on wind farms and other renewable assets such as solar farms. Site inspections are only necessary where information is not readily available. For more information on how we can help you report the correct replacement value of your assets then please get in touch with us on: +44 (0) 20 7702 3723.
About Rushton International
Rushton International is an independent and impartial asset valuation and advisory firm. We specialise in the valuation of plant, equipment and buildings for insurance purposes. With our team of qualified and accredited valuers, we have the experience, qualifications and expertise to value any asset, anywhere in the world.Read more
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