Liquidated Damages in Renewable Energy Claims: A Forensic Accounting Perspective

Green Partners Adjusting: Liquidated Damages in Renewable Energy Claims: A Forensic Accounting Perspective

A conversation with Sam Toumbev, Forensic Accounting Director, Green Partners Adjusting

In renewable energy projects, business interruption claims are rarely straightforward. What may initially appear to be a simple loss of revenue is often shaped by a more complex interaction between insurance cover, operational performance, and contractual protections embedded within project agreements.

One of the most technically demanding areas is the treatment of liquidated damages under operations and maintenance contracts. To explore this in more detail, we spoke with Sam Toumbev, Forensic Accounting Director at Green Partners Adjusting.

What are liquidated damages, and why do they matter in renewable energy claims?

Liquidated damages are payments made by an operations and maintenance contractor to a project owner when an asset does not meet agreed performance thresholds. In renewable energy, this is typically linked to availability rather than production.

They matter because they represent an alternative route for recovering lost revenue. From an insurance perspective, that immediately raises an important principle: you cannot recover the same loss twice.

So when a claim is being assessed, any liquidated damages received need to be considered alongside the insurance recovery. The objective is always to ensure the insured is made whole, but not placed in a better financial position than they would have been in had the loss not occurred.

Why is this such a complex area in practice?

The complexity comes from the fact that underperformance is rarely driven by a single factor.

Over the course of a year, a wind or solar asset may underperform due to a combination of insured damage, operational issues, environmental conditions, or general inefficiencies. Liquidated damages, however, are usually calculated annually based on total availability shortfall.

That creates a blended payment, which may only partially relate to the insured event.

Our role is to break that down. We need to understand the total liquidated damages received, analyse the underlying causes of underperformance, and determine what proportion of that payment is attributable to the insured loss. Only that portion should be offset against the insurance claim.

There is often confusion between availability and production. How important is that distinction?

It is fundamental.

Operations and maintenance contracts typically guarantee availability, meaning the asset’s ability to generate power, not the actual production of electricity. Production depends on external factors such as wind speeds or solar irradiation, which cannot be guaranteed.

This distinction is critical when assessing both liquidated damages and insurance claims. If an asset is available but not producing due to low wind, that is not an O&M failure. Equally, it may not be an insurable loss.

Understanding that separation is essential to correctly attributing losses.

What does that mean for the forensic accounting process?

It means the analysis has to be both technical and commercial.

We are not just looking at financial data. We are reviewing SCADA data, assessing operational timelines, considering meteorological conditions, and understanding the commercial framework, including power purchase agreements and, in many jurisdictions, subsidy regimes linked to generation.

The calculation itself is straightforward in principle: lost volume multiplied by price, including any applicable subsidies. But isolating the correct inputs, and ensuring they relate specifically to the insured event, is where the expertise comes in.

What makes these claims particularly challenging in the real world?

Two things tend to create the most difficulty.

First, the timing rarely aligns neatly. Insurance indemnity periods and O&M contract years often do not match, so a single claim can span multiple contractual periods, each with different performance calculations.

Second, finalising liquidated damages is often a protracted process. The calculation must be agreed with the O&M contractor, who may challenge the site’s assessment of annual performance. And, as these damages are determined over the full contractual period, it can take considerable time before the final figures are confirmed.  These delays can delay insurance settlement.

This is where some of the friction in the market arises. Insureds understandably want prompt payment to support cash flow, while insurers need certainty to ensure the claim is accurately quantified. Our role is to balance those competing pressures and arrive at a robust, equitable outcome.

Is there a standard methodology for allocating liquidated damages?

No, and that is part of the challenge.

Policy wordings are typically not detailed enough to prescribe exactly how liquidated damages should be treated. As a result, a degree of professional judgement is required.

Our approach is to focus on what is equitable and defensible. That means clearly linking any allocation back to the underlying drivers of the loss, and ensuring the rationale can be explained and understood by all parties.

Ultimately, the goal is to reach a position that reflects the principle of indemnity and can withstand scrutiny, whether from insurers, insureds, or, if necessary, a court.

What is the broader significance of getting this right?

Liquidated damages are one part of a wider risk framework in renewable energy projects.

Alongside insurance, they contribute to the overall protection of revenue streams, which is fundamental to the bankability of assets. Investors and lenders are not just looking at insurance in isolation. They are assessing how all contractual and financial mechanisms interact to manage risk.

If those interactions are not properly understood, there is a risk of either overstating or understating exposure.

From a claims perspective, getting this right ensures that losses are fairly quantified and settlements are accurate. From a market perspective, it supports confidence in how renewable energy risks are managed.

Final thoughts

Liquidated damages sit at the intersection of engineering performance, contractual structure, and financial recovery. Their treatment within insurance claims requires more than accounting expertise. It demands a detailed understanding of how renewable energy assets operate and how risk is allocated across multiple layers.

As projects become larger and more complex, that specialist capability becomes increasingly important.

At its core, the objective remains unchanged: to ensure that losses are accurately measured, fairly compensated, and never overstated.

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