Meeting Demand for Renewables – Warren Diogo shares insight

December 7, 2021

This article first appeared in Insurance Day on 19 November

By Warren Diogo, Head of London Market Renewable Energy at Sompo International

COP26 has further intensified the world’s attention on climate change. The Glasgow Climate Pact, the first ever climate deal to explicitly plan to reduce coal, also presses for more urgent emission cuts and promises more money for developing countries to help them adapt to climate impacts, accelerating the energy transition to net zero.

Inevitably, a key element of this transition will be the wider adoption of renewable energy. Good progress has already been made. Last year, despite the pandemic, the growth rate in the world’s renewable energy capacity jumped 45%, part of “an unprecedented boom” in wind and solar energy, according to a recent report from the International Energy Agency. This was the largest annual rate of increase since 1999, an expansion led by an exceptional 90% rise in global wind capacity additions, as well as a 23% expansion in new solar power installations. In fact, in 2020, renewable power was the only energy source for which demand increased, while consumption of all other fuels declined, according to the IEA. The IEA also noted that large-scale battery storage capacity rose by 35% in the US in 2020, continuing a trend of significant growth that will be vital to balancing generation intermittency associated with wind and solar

Greater commitment

However, the take up of renewables will need to accelerate further in order to meet the commitments agreed under the Glasgow Climate Pact. This will require buy-in for renewables from the wider global community, not just those that are leading the way, such as the US, UK and Europe. It will also involve the continuation of – or commitment to introduce – government subsidies for renewables and the discontinuation of fossil fuel subsidies.

In addition, in order to meet net zero targets, there will need to be significant investment in emerging technology and construction of more efficient and larger infrastructure to allow the supply and distribution of electricity and the production of low emission fuels. While retrofitting and re-purposing will be possible for some infrastructure, which can extend the life of these assets, there will be issues around the speed of transition, and in some instances, this may lead to significant supply bottlenecks and stranded assets.  For some developing countries, the perceived risk to economic growth and a reluctance to abandon cheap and reliable fossil fuels could slow the transition.  This remains a point of friction, reflected in the last-minute watering down of the text of the Glasgow Climate Pact to commit to a “phasing down” rather than a “phasing out” of coal.

Evolving risk landscape

Those companies involved in the Energy sector will also need to be aware of all the construction, operational and supply chain risks involved in the production of renewable energy and low emission fuels. New entrants will need to need to embark on a learning process to understand current trends and get to grips with rapid developments in the market.

The renewables sector is constantly evolving with technological advancements to reduce costs and improve efficiency. For example, for many years solar was attractive to renewables underwriters. But with increasing competition costs have fallen to such a degree that question marks are being raised over the design considerations, quality of components and the competency of contractors and providers of operations and maintenance.

A number of large losses due to hail, wildfire and storm damage mean that the insurance sector has struggled to make an underwriting profit. Technical issues have emerged around the effectiveness of solar panels to stow in order to protect against adverse weather conditions.

In the offshore wind market, subsea cabling – a long-standing Achilles’ heel for insurers – has recently suffered from further defective design and workmanship issues that could lead to losses running into hundreds of millions of dollars. And in onshore wind farms, there have been a material number of catastrophic turbine fires and failures due to hub locking pins located at the top of turbines not being fully disengaged. We have also seen concerning trends of blade failures and lightning strikes which, in some cases, continue to re-occur on the same units year after year.

Shifting dynamics

Insurers have a significant role to play in mitigating and transferring the risks inherent in the delivery of renewable energy assets and low emission fuels. They do so against a background of shifting market dynamics.

The green energy transition is resulting in a clear move by the oil and gas majors into renewables. This has had a knock-on effect on the insurance market. Underwriters now need to be able to underwrite across the energy portfolio: upstream, downstream, operational power and renewables. As traditional upstream energy activity declines, those insurers that may have previously focused on oil and gas business are now moving into renewables.

As energy portfolios increase in size and complexity, we will see a greater need for larger limits and mixed generation profiles (onshore and offshore).

Inevitably this will require a cross-class, multi-section policies that will have large aggregate requirements (increasingly with Critical Cat exposure). This will drive more packaged and verticalized placements. So, with the renewables market set to accelerate at the same time as it has been suffering with significant and complex claims – including weather-related losses which are estimated to have risen three-fold in the past decade – the arrival of new underwriters and capacity into the space is cautiously received.

Providing the right cover

In the face of emerging trends and shifting weather patterns – and therefore risks – due to climate change, insurance policies need to be unambiguous and respond effectively.

Sompo International is actively involved in several London Market Association and Joint Rig Committee working groups with a focus on the introduction of new clauses into insurance policies to clarify coverage intent and application in the context of emerging developments.

Key areas of work address a number of the issues above including: Wildfire Mitigation Minimum Standards – to address amongst other items vegetation management and fire suppression; Hub Locking Pin Guidance – to ensure all pins have been safely, verifiably and fully disengaged; Microcracking Endorsements – to address increasing frequency and quantum of losses attributable to microfractures/microcracking within solar photovoltaic (PV) technology; and Serial Loss Clauses – with enhancements and differentiated cover for serial losses.

The renewable energy sector continues to present a challenging risk profile and this is destined to become more complex as the industry evolves. Whilst the market has shown disciplined hardening over the last 24 months, further improvement is still necessary to ensure long term viability. To meet the more ambitious targets for carbon cutting set at COP26, it is crucial that underwriters, brokers and clients work together to protect the stability and sustainability of the insurance market so that it can effectively support the transition to renewables.

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