Growing renewables market faces evolving risks
The renewables sector is set for rapid growth, but energy companies and their insurers face rising natural catastrophe and business interruption exposures, as well as supply chain and technology risks.
A global effort to transition from fossil fuels is underway. The result is a huge investment in renewable energy sources, such as wind, solar and green hydrogen. Some $755bn was invested globally in the energy transition last year, up 27% on 2020, according to Bloomberg. Annual global clean energy investment will need to more than triple by 2030 to about $4trn if the world is to achieve net-zero emissions by 2050, according to the International Energy Agency.
The share of renewables in the world’s energy mix is expected to double in the next 15 years, says Max Benz, head of energy and construction at AGCS. In Germany alone, planned investment in net zero is expected to triple by 2030 to Ä860bn, of which Ä415bn will go into the energy sector, finds analysis by Boston Consulting Group.
“These are huge investments and in a very short period of time,” says Benz. As a result, renewable insurance premiums are predicted to grow by an annual compound rate of 14%, mirroring the growth in investments, he says.
The majority of growth will come from solar and wind, where technology is relatively well established, explains Susana Huete Santos, energy underwriting manager for Spain at AXA XL. Insurers are comfortable with such risks and market capacity should keep pace with growth in the renewable sector, she says.
However, the increasing size of wind farms, turbines and solar parks, particularly in catastrophe-exposed areas, will increase exposures and offshore wind projects are becoming more technically challenging, Huete says. Substation transformers, which connect entire wind or solar projects to the grid, also represent a large business interruption risk, she explains.
Changing risk profile
Typically, the onshore wind and solar market has been characterised by high-volume but low-severity losses, dominated by machinery and electrical breakdown incidents, according to Warren Diogo, head of renewable energy for London market and Europe at Sompo International. However, the traditional risk profile of renewables is changing, he says.
There has been growing concern around large losses in the onshore wind and solar market from extreme weather events, according to Diogo. “Non-traditional cat perils, like tornadoes, hailstorms or wildfires, which we refer to as secondary perils, have caused some of the largest single losses to the renewables market, particularly hurting those carriers writing larger line sizes,” he says.
“There has also been a concerning number of larger losses from turbine fires and turbine collapses too, often caused by lightning strikes, and a result of larger, more severe convective storms. This trend of larger, severe losses is something underwriters and clients need to consider and adapt to,” he adds.
With many of the ideal sites for wind and solar projects already taken, companies are looking to more remote locations to develop installations, explains Diogo. “Often these are coastal areas, for example, and more prone to extreme weather-related events,” he says.
Wind farm developments are planned in the US hurricane-exposed Gulf Coast, as well as in Taiwan and Japan, which have earthquake, tsunami and windstorm risks.
Aggregate exposures will become a growing area of focus for the renewables sector, predicts Diogo. For example, as more wind and solar installations are built, particularly offshore, more aggregate capacity for convective storms is needed. “This aggregate issue will certainly become a challenge for some energy underwriters in the near future,” says Diogo.
According to Benz, natural catastrophes and business interruption are the largest insured exposures for renewable investors. Offshore wind farms are particularly challenging as projects are increasingly located in more remote and hostile locations. There are currently a number of proposals to build large offshore windfarms in deep water far out at sea, which require long connections to land and substantial underwater infrastructure, like substations and connectors. Remote installations are also more expensive to repair and replace.
Insurers have recently seen some of the largest claims for offshore wind, in particular for damage to converter stations and underwater connector stations. These are few in number but they are expensive to repair and losses are significant, says Benz.
Larger and more remote offshore wind projects will increase exposures and require more insurance capacity, as well as raise questions around the skills and specialist vessels required to repair turbines and substations, says Benz.
Some projects also have large contingent business interruption exposures, where windfarms or solar projects are reliant on third-party-owned infrastructure, such as a converter station, to supply power to the grid. “Contingent business interruption is a difficult topic as the accumulation control is very sophisticated and our industry has not yet found a proper solution to deal with that,” says Benz.
“As an insurance industry, we need to keep an eye on accumulation of nat cat exposures, although onshore installations can probably be well distributed. But for offshore wind this is more critical,” he says.
Diogo also notes that renewable energy installations are becoming increasingly interlinked and interdependent. For example, in the German North Sea, several windfarms are clustered in the same area and share many of the same offshore grid connections. Subsea export cables and offshore substations present a single point of failure that could affect multiple windfarms and all the associated electricity generation at once.
“With long lead times, limited specialist vessel availability and current supply chain constraints, wind farms can be left unable to export electricity for very long periods. This type of contingent business interruption is perhaps the most underrated exposure in the offshore market and in a perfect-storm scenario could ultimately present a market-changing loss event,” says Diogo.
Unlike the traditional energy space where technology is mature, technology in the renewables sector is advancing all the time, explains Diogo.
“The renewables market is constantly striving to reduce costs, increase scale and efficiency and, therefore, is always pushing technological boundaries. There is underlying design and prototype risk here in this rush to build new, larger and more efficient turbines, for example,” he says.
One concern for insurers is the exposure to serial losses, especially in a fast-growing market, according to Benz. “With newer technologies, and particularly fast-growing investments, technology may not yet be 100% fit for purpose. If new technologies are rolled out to hundreds of windfarm installations, you run the risk of serial losses. One technical fault can be multiplied several hundred times,” he says.
“Looking at the huge investment we are anticipating in wind and also hydrogen, we have to observe very carefully whether contractors have the experience of the latest technology and that they don’t take shortcuts, just for the sake of delivering more in short periods,” says Benz.
He doesn’t anticipate capacity issues for the green energy market overall. “For onshore wind – where growth is rapid and the values at risk are usually small – there is ample capacity and competition. For offshore wind, it is a different picture and the market is less competitive,” he says.
So, offshore wind may find things more difficult, says Benz. “Offshore wind installations are becoming bigger and more complex, and there are only a few companies in the insurance market with the underwriting, claims handling and risk engineering knowhow, as well as the capacity, to lead those. And new technologies out at sea will need to be carefully analysed,” he explains.
After several loss-making years, followed by rate corrections and improved terms and conditions, the renewable energy insurance market has shown early signs of a return to profitability, says Diogo. This, combined with an influx of ESG- driven capacity for 2022. has resulted in “some [market] softening”, he says.
“This is somewhat premature, given that lessons are still to be learned from the loss-making years, and that many future risks – associated in large part with climate change – are proving to be very challenging to quantify and adequately price,” Diogo warns.
The renewable sector, like many others, is being hit with supply chain disruption, shipping delays and inflationary price increases, which is leading to higher replacement values and increased costs of business interruption, according to Huete.
“With inflation, clients should re-evaluate their assets, and this is something all insurance companies should be looking for. To replace a turbine today will not be the same price as a year ago. Sums insured need to be accurate, and with supply chain delays and inflation, future business interruption losses are uncertain,” she says.