Michael Bogdan, Vice President, Lockton Global Energy

Lockton is the largest privately held, independent insurance broker in the world and 9th largest overall.  More than 7,000 professionals at Lockton provide 50,000 clients around the world with risk management, insurance, and employee benefits consulting services that improve their businesses.

Lockton Global Energy’s industry specialists provide innovative and cost-effective risk transfer solutions for clients in the energy industry, focusing on upstream, midstream, downstream, utilities and renewables and power.

So, what does that actually mean? 

Lockton is an insurance advisory firm headquartered in the US with offices around the globe.  They help companies manage their insurance programs.  They work with companies in virtually any industry, ranging in size from the small company down the street to some of the largest power plants in the world.

The Lockton Global Energy team is a niche group based in London that advises Lockton’s larger energy clients.  My role on the team is to focus on our renewable energy clients.  Typically, a client will ask me to evaluate an individual power plant to help them understand and mitigate the financial consequences of a potential unplanned outage due to something like a fire, flood, earthquake, storm, or equipment malfunction.

It can take tens or even hundreds of millions of dollars to build a wind or solar plant and these projects tend to be highly levered with lots of debt on their books, so the owners need a reliable cash flow in order to pay their employees and service their debt if the plant suffers an unexpected shut down.  My role is to evaluate the existing or proposed plant, make recommendations to help them avoid unplanned outages, and then structure a financial product to transfer the financial risk of an outage from the power plant’s balance sheet to the insurance company.  Essentially, they’re obtaining access to the insurance company’s large pot of money for a fee.

The first step is to evaluate what the financial consequences of an unplanned outage would be, which starts with a review of the income statement.  There are basically two ways that a wind or solar plant can generate income, the first is energy revenue – you generate electricity and sell it to the grid for some dollar amount per megawatt hour.  The second way to generate income is subsidy revenue.  For example, in the US you get a tax rebate, say $1.50 for every $1 you earn in revenue, that you can then sell to another company.  I also look at how much they get paid for a unit of power vs. the cost of goods sold (COGS).  When you look at all that together, you get an idea of how much money would be lost in the event of an outage.

Next, I review the plant’s location and the condition of their technology.  A plant built on a floodplain or on the San Andreas fault is more likely to have an outage and property damage due to flood or earthquake than a plant built somewhere more stable.  It’s also more likely that a plant will have an outage if they’re using second hand equipment or products from a less-reputable manufacturer.

After that I analyze the plant’s power purchase agreements (PPAs), warranties, and loan agreements.  Sometimes these agreements make the impact of an outage worse, such as PPAs with stiff penalties for outages, and sometimes they can help recoup some of the losses via insurance or warranties.

Once all that is done, I work with the client to negotiate the cost and terms and conditions of an insurance product.  No two power plants are the same so each policy is bespoke, not an off the shelf product like you might have when buying your house or car insurance.

It’s really interesting because we can come in at all different points in a power plant’s lifecycle.  Sometimes we’re brought in pre-construction, sometimes we’re brought in after a plant’s been operating for five to ten years.  We had a client that brought us in with plans to build a concentrated solar power (CSP) plant, that’s a plant which uses mirrors to heat a liquid that spins a turbine.  Those projects are incredibly complex and we were brought in to help with site selection and supplier selection since these things can greatly impact the cost of insuring a plant.  Sometimes we’re brought in when a client has an acquisition target and they provide us with pre-sale data to give them an idea of what the key issues are to consider.  The analysis we provide is an important part of the M&A due diligence process, along with legal, financial and environmental issues.

One of the biggest changes in the marketplace right now is the transition from utility owned power generation to private equity (PE) owned generation.  Utilities are selling off their power generation assets to smaller concerns that may lever them in order to get the most profitability from these projects.  Essentially, the PE firms can take out big loans to buy these assets, upgrade them, and seek to improve profitability through more efficient operations. It’s very different from the typical utility model.  If a utility wants to do a project, they can simply charge their ratepayers (the homes and businesses that use electricity) more to finance the project.  Some utilities even have balance sheets as big as some insurance companies, so they don’t need as many insurance products because they can absorb losses from an outage more easily.  PE owners have to operate in a very different way, they often prefer much more robust risk transfer, so there are more insurance coverages to consider.  Many utilities have always carried some form of insurance from structured companies such as Lockton, but they don’t rely on them as heavily as PE firms do.  It’s interesting to watch as the role of insurance in power generation is evolving to become more relevant.

One of the most important factors on the likelihood of an outage is location.  We use wonderful Geographic Information Systems (GIS) that take the coordinates of a plant or proposed site and tell me if it’s on a floodplain or fault line.  Interestingly enough, some project leads still build on sites such as these since the potential revenue is so high.  I also encourage my clients to push for robust commitments from their suppliers.  For example, if you are buying $300M of equipment for a new project and you have a track record of buying from that supplier, you should have enough leverage to get the supplier to provide their own forms of indemnification.  You can get contract terms so that if there’s an outage in the first five years, the supplier has to pay for the cost of the outage.  You can also try to push back on the clauses in PPAs that require penalties in the event of an outage.

What are some of the key skills for success in this role?

There are elements of finance, law (contracts), and engineering (understanding the different technologies), but you don’t need to be a banker, lawyer, or engineer to do this job.  You need to be able to do a bit of each of those and have excellent attention to detail along with a great ability to get the facts straight.  Most people learn the fundamentals of insurance on the job.

I personally have a liberal arts background with a sincere interest in renewable energy.  You need to be really well rounded and open to lots of on the job learning.  If you’re a great engineer but can’t focus on the details of the contracts, that’s a problem.  If you’re really focused on the finance aspect but can’t see past the spreadsheets, you won’t be successful.

What is your favorite part of your job?

I get to help projects operate more efficiently, travel the world, and provide for my family.  I’m also very passionate about renewable energy and that enables me to connect with my clients in a meaningful way.

Clients often call on us whenever they’re going to embark on a new venture, so you always feel like you’re in the middle of the action.  I have one client that converted a large coal fired plant to a biomass plant.  They had contracts with a bunch of managed forests and were planning to use the harvested timber for fuel and then replant.  We reviewed the risks associated with making that change.  That’s a very high-level engineering feat because you have to adjust the burners to deal with a different type of fuel, so that analysis was really interesting.

Another client of mine is using an innovative gasification technique to take methane from landfill that would otherwise go into the atmosphere and channel it to provide rural electrification in emerging markets.  It’s fun to be on the project team and get your hands on exciting electricity projects like these.

What is the hardest part of your job?

The time pressures can be pretty tough. A lot of times you’re dealing with mergers and acquisitions for power plants, so there are a lot of deadlines and lots of money at stake.  Sometimes people come to you a lot later than they should and when they’re excited and ready to celebrate the deal but you bring them some bad news about the risks of the project, you’re not very popular.  That news is hard to hear.

What is your proudest professional achievement?

I’m very proud that I’m part of the overall process that makes more solar and wind plants possible.  Banks typically provide 80% of the financing for these projects, and the banks won’t give out those kinds of loans if we can’t prove that these projects are insurable.  It feels great to be a small part of that.

What are the game changers in your world?

The big change in ownership of power generation assets has been a huge game changer in this industry.  Going from utility owned, built, and operated power generation, to heavily privately owned and leveraged plants has been a huge multiplier.  More projects are now possible because of that change, and more work has to be done to keep these projects going.

Climate change has also been huge.  Our business deals with damages from floods and storms that result in losses.  A recent large loss was the total loss of a solar plant from a hurricane.  More and bigger storms have put pressure on insurance companies to insure these plants.  Large insurance companies like SwissRe are putting out statements that climate change is their biggest source of risk.  SwissRe is even investing a lot of their capital in renewable energy to help abate climate change.  They also have made a statement that they will not insure coal fired plants anymore because they don’t want to support this major contributor to climate change which increases the risk to our industry.

What was your path to this role?

I took a circuitous path to this role.  I started out with a liberal arts background and a general interest in the adoption of renewable energy technology, then I learned more about the energy insurance industry when a friend told me about it.  I decided to study energy and environmental policy in graduate school at the School of Advanced International Studies (SAIS) at Johns Hopkins.  I got my first job in the space through on-campus recruiting in grad school.  They were hiring and I applied online.  That almost never happens!

That first job was in a similar role at a different company in New York.  They transferred me to London, and then I moved to Lockton.  London is a wonderful place for this kind of work as much of the global complex risks find their way to London.

What’s your advice to someone interested in a role like this?

I’d say start by finding something you’re passionate about; be it fashion, or insurance, or technology, and then you can find a way to incorporate sustainability into that.  I started out being fascinated by wind turbines – I looked at one and just wondered “How can that thing make electricity?”  There are so many jobs you can do to support your passion – you could be a lawyer doing due diligence on wind farm contracts or a banker doing quantitative models for a solar plant.  Figure out what your passion is and try to combine that with a skill you have.

What are your favorite resources?

There’s a paid newsletter called Inspiratia which tells you which PE firms are active in what areas.

North American Windpower offers a great free newsletter.

reNEWS is a UK based organization that tells you what’s going on in the industry.

I also follow the Twitter feeds of the network system operators.  They’re not actual power companies, but they’re the people who balance power supply and demand.  The biggest is network operator is PJM, they manage the PA/NJ/MD power grid and the work they do in managing their power network is cutting edge.

National Grid also has a great Twitter feed.  They tweet things like this % of power is coming from solar/wind, what the total demand is, demand spikes and troughs.  It’s great, if you’re into that sort of thing.

Who (or what) is your sustainability hero? 

I’ve seen a lot of companies do some really innovative things with great leadership.  For example, IKEA invests a lot in renewable energy, even though they’re a furniture company.  They actually own over 1GW of renewable energy wind farms.  Their goal is that for every MW they use they want to put a clean MW out.

Other companies are showing strong sustainability leadership too.  BMW uses landfill gas methane to help power their plant in Spartanburg, SC.  When brands drive sustainability, the world really seems to listen.