Insurance Industry to Benefit from Clean Energy Boom

The renewable energy industry could be spending three times as much on insurance every year by 2020 to mitigate risks to projects, says a report by Bloomberg New Energy Finance.

The report, commissioned by Swiss Re, looked at six of the world’s leading markets for solar and wind, namely Australia, China, France, Germany, the United Kingdom and the United States. Depending on the scenario, insurance premium volumes in these markets could increase from $850 million today to between $1.5 billion and $2.8 billion by the end of this decade.

Drivers of increased demand include growing industry scale, but also the trend to more difficult offshore wind environments and interest in the sector from more risk-averse investor groups.

Based on current projections, new renewable power capacity built worldwide between now and 2030 will account for more than $2 trillion in total investment. Of this, 75 percent or 900 gigawatts of capacity additions will be in solar and wind sectors, both onshore and offshore, and over half of this will be attributable to Australia, China, France, Germany, the United Kingdom and the United States.

The growing demand for managing risk in these six markets comes as owners and developers of renewable energy projects are seeking to tap into new sources of financing, including from institutional investors such as pension funds, according to the report. To make investments in renewable energy more attractive to these investors, projects must become less risky, from construction to operation.

A key sector where risk management is needed is offshore wind. Besides the technological complexity involved, offshore wind farms are exposed to adverse weather and operate in a very difficult physical environment. Damage, delays and downtimes are not uncommon and can significantly reduce the returns on investment.

Onshore wind and solar projects carry construction and operational risks as well, but are also likely to become more exposed to new, market-related risks as regulators try to wean operators off subsidies and encourage them to compete in open, competitive electricity markets. These risks include balancing charges, curtailment due to grid constraints, counterparty risk, retroactive policy changes and power price volatility. Operators may find ways to manage these risks internally but are also likely to make greater use of third-party services as new risk management products are developed.

Guy Turner, chief economist at Bloomberg New Energy Finance and lead author of the report, says the demand for risk management in the sector will grow, partly because the renewable energy sector will get bigger, but also because of increasing uncertainty affecting power markets in general.

“As the renewables mature and become part of the mainstream energy industry, they will need to evolve from an innovative sector where risks are taken on the chin, to one where returns are predictable and there are fewer surprises,” Turner says.

Insurance can help the sector deal with surprises. “Insurance is not a silver bullet. But by mitigating the risk in the construction phase and improving the consistency and surety of revenues during operation, insurance can help improve the return on investment for renewable energy projects,” says Juerg Trueb, head of environmental and commodity markets at Swiss Re Corporate Solutions. “This, in turn, would allow the sector to attract the scale of investment necessary to put the world’s energy mix on a more sustainable footing.”