The Blog - Wind energy market analysis

Posted 17/08/2018

Richard Heap

   

What is technical escrow and is it right for you?

Giant project and turbine sizes are exposing wind investors to larger risks than ever. How can technical escrow agreements help manage them? Richard Heap reports

Technical escrow

The giants are coming. In Europe and the US, work is underway on multi-gigawatt onshore wind projects that would have been unthinkable to all but a handful of industry visionaries.

Records will be broken offshore too. Danish utility Ørsted is building its 1.2GW Hornsea 1 in UK waters, and is set to follow this with the 1.8GW Hornsea 2 and 2.4GW Hornsea 3.

And some of these projects will use turbines as tall as skyscrapers. General Electric’s 12MW Haliade-X will be taller than New York’s 30 Rockefeller Plaza, and its rivals are eyeing 10MW.

Giant schemes, giant turbines – and also giant financial risks. These investments can run into the billions of pounds, euros or dollars, which puts investors under pressure to protect their investments:

“The business is becoming so big, the risks have increased and, therefore, the bigger the investment then the more assurances you want for your investment,” says Lone Wigh, global product manager in the DNV GL Energy, Renewables Certification team.

One potential solution to the fiscal challenges posed by industry gigantism is technical escrow.

Technical escrow agreements have been a factor in the larger contracts in the wind industry for the last 20 years, according to Wigh. She says they are standard in all European offshore schemes and in large onshore schemes where bank lenders are involved.

In this article, we’ll look at how these contracts work, how they can help investors, and how manufacturers can ensure that any data they share about their technology remains safe.

 

What are technical escrow agreements?

The most common use of the term ‘escrow’ is in the real estate industry. It refers to a type of account used in a large transaction where a third party holds the money for that deal.

For example, one company agrees to buy products from another company. The buyer doesn’t want to give the seller all of the money up front, in case the seller reneges on the deal, and so they put the money in an escrow account run by a third party. The cash is then released to the seller when the buyer confirms that they’ve received the products.

Technical escrow agreements in the wind industry use a similar principle, but there’s data in that third-party account rather than money. Specifically, a wind farm owner enlists a third party to set up an escrow account to hold technical documents from the manufacturer about the technology used at their wind farm.

This means that the wind farm owner can still access sensitive data about the turbines in their project if the manufacturer cannot help – for example, if the company has gone out of business – or refuses to do so; or if the owner has lost original copies of the information.

For investors, this is important because they rely on a certain level of electricity production at their wind farms to make the financial returns they’re targeting. If a turbine breaks down and the manufacturer is unable or unwilling to help, this can severely harm project returns.

“The key interest is the need for help or spare parts, or in the case of bankruptcy, because an investor cannot really afford turbines to stand idle for very long,” says Wigh. “Many spare parts will require the specifications so that another manufacturer can produce them, to match the existing components and fulfil the technical requirements. Nowadays, securing access to such information is among the main concerns of the wind farm owners, whereas the risk of bankruptcy drove the earlier contracts.”

It is up to the owner and turbine maker to agree on the documents that go into escrow, and typically they include information such as turbine specifications, parts lists, manufacturing drawings, purchasing specifications, manuals, software, and as-built documentations.

Wigh says DNV GL has been offering these services for around 20 years, as it is an extension of its turbine certification work. The cost for simply storing information for around 20 years is typically in the region of €10,000, while it is between €20,000 and €40,000 to review it at point of storage as well.

Typically, the service includes a confirmation letter of deposit at point of initial storage and on optional basis a status letter at end of the first five years of contract, where warranty periods may run out reflecting the amendments that have been done in the escrow account. There are extra costs at any stage an engineer or administrator has to get involved in checking the data, which can include thousands of documents.

“All this with the escrow agreements is done at the contracting phase, when the wind farm owner’s deciding what turbines to buy, and normally it’s the lawyers that are involved in the whole process,” she says.

For turbine makers, the designs are sensitive intellectual property (IP). As such, they need to ensure that the documents are held securely and only released if the release requirements are met.

 

When would this information be released?

While a company like DNV GL would hold the technical information in escrow, it would not make the final decision when to release it.

If an owner got in touch to notify the escrow manager of a dispute and request the release of the information, the escrow manager would start by talking to the IP owner. If the IP owner objected to the release, the escrow manager would then need to appoint a ‘release committee’. This would typically be made up of three experts that look at the dispute before deciding on whether the technical documentation should be released.

In that respect, Wigh says it is similar to arbitration and can help prevent IP disputes in the wind sector going to court:

“Normally, it’s in everyone’s interests to find a solution,” she says. “Nobody wants turbines not producing power. That’s not good for the manufacturer, it’s not good for the wind farm owner, it’s not good for anyone.”

Releasing information at the wrong time is one problem that the technical escrow manager has to avoid. However, another risk of this service is that sensitive turbine information could be released as a result of a cybersecurity breach.

 

How is this information protected?

IP protection is a big issue for the wind sector, as losing control of sensitive data can mean a manufacturer loses a competitive edge. Information in escrow must be held securely.

In these escrow agreements, files are delivered through a secure upload and onto a secure server. This is typically done by using a File Transfer Protocol server; or a USB or hard drive. The data is then encrypted and held on a system with very restricted access.

Wigh says that the protocols differ for different clients and agreements. However, she says that one customer’s information is stored in a system with three different password ‘gates’. All of the information is classed as ‘secret’, which means it is seen as sensitive even if it is seen by unapproved DNV GL employees. Only a limited number of people is able to access the information and all have security training.

The company also has processes in place including malware detection software, to protect it from external attacks; and other restrictions to protect the information from accidents.

Matt Freeman, global director of cybersecurity at DNV GL, says that all operators of escrow services need to have good cybersecurity policies and principles in place. He says there are broadly three types of cybersecurity risks for businesses – processes, people and systems – and so any technical escrow operator needs to operate to agreed processes, store data in a safe way, and make sure those who can access the documents are properly screened:

“The landscape changes all the time. You can’t just do it once and assume it’s all good,” he says.

More generally, he adds that wind farm owners should be more aware of cybersecurity risks as wind plays a bigger role in the global energy mix. This includes looking at procedures for managing access to and from wind farms; regular risk assessments; and vulnerability testing.

In technical escrow, that focus on security means continually monitoring data and updating systems so that information can still be accessed when it’s needed. There’s no point holding the technical documents if they’re in a format that can’t be accessed when it’s needed.

As projects keep growing and wind farm owners keep buying larger machines, the industry is approaching the future with excitement. But change is rapid. Companies change, people move on, projects are sold, and new owners come on board. In this context, it is important that project owners can access technical information through the lifespan of their projects.

The industry is moving fast – and, wherever it goes, technical escrow can help to protect owners and investors on the journey.

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