Page 276 - Sustainable On-Site CHP Systems Design, Construction, and Operations

Managing Risks during CHP Plant Construction 249

In addition to lenders and developers, the government, contractors, suppliers, and the
public have legitimate insurable interests in a planned CHP plant project. During the
life of the CHP plant project, these interest classes are likely change in importance and
can result in divergent views. To adequately deal with those different interest classes
that are likely to change, one needs to have the insurers focused coordination of the risk
and insurance strategies and central purchasing of coverages and supporting services.
Financial interests in funding the design, construction, and resulting CHP plant
operation often dictate the terms and rigidly enforce their compliance. Unfortunately,
should significant gaps between the financial institution’s expectations of eventual
CHP plant profitability and those of the insurers regarding CHP project risk exist, failure
to identify the so called expectation deficit can lead to serious problems later and their
discussion is beyond the scope of this chapter but should be openly discussed among
those interested parties prior to engaging an insurance carrier. Having CHP owner-
operator contract professionals meet the underwriter to reduce the deductible waiting
periods, substitute a financial deductible for a daily deductible, amend the indemnity
measure to reflect the true loss, and/or extend the indemnity term beyond the outage
period can be benefits worth discussing before policies are executed.
This discussion should involve the professionals negotiating the financing and
power purchase contracts and the professionals negotiating the insurance and risk man-
agement contracts who will need to work closely together so that the balance of retained,
assumed, and transferred risk referenced above is maintained. Power project insurance
programs are generally arranged in two phases; namely:

Phase 1. Comprising the construction phase, including any testing and commis-
sioning periods
Phase 2. Encompassing the CHP plant operating phase and which is generally
reviewed on an annually renewable basis

An Overview and Limitation of Current Practice
When most contractors estimate construction costs for a proposed CHP project, they
often look at past CHP projects as the database to be adjusted for future projects. Con-
struction costs used in forecasting based on the analysis of only a small sample of his-
torical in-house CHP projects with some form of cost breakdown, bearing some
resemblance to the proposed new CHP project, becomes a natural starting point. How-
ever, where there are no past cost data available, experience and skill must play a role
in collecting information to estimate yet unknown costs. Several factors interact and
affect the reliability of the cost estimate including the extent of CHP design information
available; the availability of in-house or published historical price data related to the
CHP project under consideration; and the familiarity with constructing the proposed
CHP project and/or other CHP projects of a similar scope and size.
Yet it is important to understand that CHP project costs used in any forecast can
only be as good as the sample on which they are based. All else being equal, it is desir-
able that the sample should be as large as possible. Equally important is that the sample
contains only related CHP construction projects closely resembling the proposed project.
In other words, the sample should be reasonably homogeneous with respect to the
major cost significant features of the proposed CHP project.