Insights

Energy in a time of change: James McDonald and Peter Hubbard discuss the challenges and opportunities

August 18, 2023

The energy market is in a period of exciting but often challenging transformation. The need to transition to a lower carbon economy, geopolitical and economic fluctuations and supply chain crunches are prompting risks for both traditional energy supply and renewable projects. Sompo’s James McDonald, Global Head of Energy, and Peter Hubbard, Renewable Energy Underwriter, discuss the challenges and opportunities for energy clients and the role insurance has to play.

The confluence of geopolitical events and their effect on oil and gas supply and prices, coupled with the ongoing drive to transition to lower carbon-reliant energy sources, means that energy clients and their insurers face a dynamic risk picture.

The dramatic spikes in energy prices caused, in part, by the ongoing conflict in Ukraine, elicited differing responses from governments around the world, some of which incentivised the reopening of coal-fired power stations, for example, while others pushed for a conversion from coal to gas to reduce emissions.

And while increases in oil and gas prices might historically have spurred energy companies into increasing their exploration and production, stakeholders across the spectrum, including regulators, have maintained their focus on companies’ commitments to moving to greener energy sources.

Against this backdrop, the development of technology in less carbon-intensive and sustainable forms of energy has continued apace. And this has been fueled in no small part by measures like US President Biden’s 2022 Inflation Reduction Act, which was aimed at encouraging investment in domestic manufacturing, innovation and productivity with the renewable energy sector being a targeted beneficiary of this legislation.

As energy companies and original equipment manufacturers grapple with the challenges and opportunities posed by the energy transition, risk transfer will play an important role in helping not only to manage risks but to facilitate and enable change.

Making changes

As well as making moves into renewable energy, traditional energy companies have been exploring ways to make existing energy production less emissions-intense. For example, some companies involved in fracking have been switching to use electrical generators for their fracking fleets, rather than diesel generators. Not only is this a greener way of producing power, it also potentially represents an improvement in risk, as the temperatures involved are much lower, reducing the risk of fire associated with flammable hydrocarbons.

Another area where there has been an uptick in activity is the laying of subsea cables to transport electricity, among other purposes. Energy underwriters have expertise in this space and a healthy volume of insurance premium has been generated here to enable the risk to be transferred, reflective of the risk these projects represent.

Renewables risk and opportunity

Over the last 12 months, there’s been a great deal of activity in the renewables space as energy clients look to diversify into greener energy sources. There is a real awareness that energy production must change, and this, coupled with incentives from governments and pressure from stakeholders, means there’s more momentum in the renewables space than ever before. For the first time ever in 2023, renewables capex investment will exceed that of the oil and gas sector.

The investment in renewables is being seen both onshore and offshore, with wind power, solar power and battery storage three major areas of growth. Insurance has an important role to play in the development of these technologies.

As well as the construction risks associated with any new project, developers and contractors are faced with the twin challenges of supply-chain crunches and price inflation.

The world is still reeling to a large degree from the supply-chain difficulties caused by the COVID-19 pandemic. And this has been compounded by geopolitical pressures that have resulted in delays in supply of crucial raw materials, components and specialized equipment.

We are advising our clients to explore and develop suitable contingency plans to help avoid supply-chain difficulties and long lead times.

Economic trends also are affecting the risk associated with renewable energy projects. Oftentimes, these projects have fixed-price contracts, negotiated years prior to the scheduled works start date – a challenge in today’s inflationary climate whereby prices for many goods and services have increased significantly. This is impacting the economic viability of some projects and developers and Insurers exposure to repair costs and revenue interruptions for those projects that continue.

The development of renewable energy projects will, and must, continue, and insurance will act as a transition enabler to help clients to manage and equitably transfer some of these risks.

Eyes on the future

The energy market will continue to investigate new ways to generate power both to meet its own emissions targets, and to help society meet its net-zero goals.

One area that is primed for development is hydrogen power. There are some challenges around the production of hydrogen, as this requires large amounts of electricity, and storage and transportation are also not without risk. But we can expect to see hydrogen grow in importance as an energy source in the near future.

Underwriters will continue to work with energy clients as they transition to new ways of producing power. Our clients are at different stages along this journey, and their risks are changing all the time.

By understanding these risks and working to find ways in which they can effectively be managed and transferred, insurance has an important role to play in not only helping traditional energy companies to change, but new technologies to develop.

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