Renewables ‘gold rush’ requires new approach to insurance

A ‘gold rush’ in renewable energy investment will bring huge opportunities for insurers, but it will require more efficient and innovative processes for assessing and transferring risks, according to Hamish Roberts, global renewable energy leader at Marsh. To reach net zero by 2050, investment in clean energy and infrastructure will need to more than triple, reaching an estimated $5trn by 2030, according to the International Energy Agency (IEA). The resulting transition will require an unprecedented transformation of how energy is produced, transported and used globally, it states in a recent report. Under a net-zero by 2050 scenario, almost 90% of electricity generation will need to come from renewable sources, with wind and solar PV together accounting for almost 70%, the IEA predicts. In In order to achieve this, additions to solar and wind power will need to increase by more than four times the record level set in 2020. For solar PV, this is equivalent to installing the world’s current largest solar park roughly every day. According to Roberts, the transition to renewable energy from fossil fuels should equate to higher demand for insurance. The pace of innovation and scale of renewable projects will lend themselves to insurance, which can de-risk investments for investors, he said. “The transition to clean energy will be a massive challenge but it will also be a huge opportunity for the insurance industry,” said Roberts. The expansion of the renewable sector is also likely to be accompanied by growth in industry mutuals and captive insurance, as was the case for the oil and gas sector in the 1970s, according to Roberts. “We already see oil and gas companies deploy their captives for renewable projects,” he said. The transition to clean energy – solar, onshore and offshore wind, tidal, geothermal, hydro and battery storage – has garnered both political and investor support, with demand for renewable assets now exceeding supply. The pace of activity and investment in the renewable sector is “simply staggering”, with investors competing to acquire wind and solar licences, explained Roberts. For example, the recent ScotWind offshore wind leasing round attracted 74 bids for just 15 areas of seabed. In South Africa, a recent round of tenders attracted 102 bids for the right to produce just 2.6GW of wind and solar capacity. “Many companies have more money for renewables than they can deploy. It is like a gold rush – a financial, altruistic and political renewables race. But while gold rushes are exciting, they also have a downside. If companies can’t invest where they want, they might be tempted to invest in other areas – and other areas might mean projects in territories with political or weather risk. Inevitably, as companies look to deploy more capital, they will have to take on more risk,” said Roberts. The ‘gold rush’ in renewable energy is a boon to the insurance industry but the speed of change will challenge the traditional process of assessing and transferring risks to the insurance industry, warned Roberts. Risk managers, brokers and insurers are being given little time – sometimes just weeks – to assess the risks of renewable projects and scope insurance arrangements. Insurers and brokers, too, will face a skills shortage as demand for renewable insurance increases, he explained. Faced with these challenges, the insurance industry and its clients need to find more efficient ways of arranging insurance, said Roberts. The process needs to be more efficient and simplified, he said, noting that the energy insurance market defines value in terms of “complexity and expertise”, taking a silo approach to underwriting renewable risks. If insurers and their clients are to keep pace with growth in renewables, they will have to take a more strategic approach to insurance, rather than arranging cover on a project-by-project basis, according to Roberts. Marsh, for example, recently completed a deal for an energy client that provided aggregated cover under a single policy with a single panel of insurers, covering both onshore and offshore construction and operational risks. The single programme saved time and money, said Roberts. “Buying programme by programme, market by market, for each project is inefficient. Clients do not have the time for brokers and insurers to pick their way through a portfolio of renewables and seek out the parts they like. There are too few people and they have too much on their desks, so we need to change. We need to find simpler, smarter and more efficient processes,” Roberts said. “We will need to break the insurance market’s historical segmentation mentality and get to a strategic level if we are to keep up with developments in the renewable sector,” he said. The renewables sector was born out of the oil and gas industry, and many of the risks will be familiar to energy insurers, albeit at a different scale, according to Roberts. Solar and offshore windfarms are getting bigger, while the next big challenge will be offshore floating windfarms, which could include battery storage facilities and even hydrogen production plants. Huge solar projects are being built in remote locations. In Australia, the proposed Sun Cable project will link the world’s largest solar farm and battery storage facility in the Northern Territory to Singapore via a 4,200km undersea cable (costing in excess of $20bn). However, the emerging renewable sector will be an “evolution” in technology, rather than a revolution, according to Roberts. Insurers will learn how to underwrite such risks, although there will be risks where there is a lack of historical data, he said. For example, hail is a major risk for solar farms but there is no historical record of hail storms in remote or desert locations. “In the absence of data, markets struggle to put out meaningful levels of capacity. So we will need to deploy modelling and engineers in order to support clients with new risks and territories,” he said.

Renewables ‘gold rush’ requires new approach to insurance

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