Renewable energy industry risks and insurance liabilities
The need to accelerate the shift to low-carbon energy sources will require significant investments if the planet is to reach net-zero by 2050. However, there will be considerable challenges to come. In this article, we analyse the primary risks for the renewable energy industry sector as well as potential insurance industry liabilities moving forward.
Global investment in clean technologies is set to rise to USD 1.7 trillion in 2023, while around USD 1 trillion will be invested in fossil fuels, according to the International Energy Agency (IEA) World Energy Investment 2023 report, published in May.
The renewable energy sector, primarily solar, wind, hydro and biomass, will play a critical role in the transformation. The recent global energy crisis has been the catalyst for the acceleration of renewable power installations, with the world set to as add as much renewable power in the next five years as it did in the past 20, noted the Renewables 2022 report by the IEA in December 2022. In addition, the 2023 IEA report indicates that investors will spend more on solar power than in oil production in 2023 for the first time, clearly signposting the speed and scale of the global shift to low-carbon sources.
Recent initiatives like the infrastructure law and Inflation Reduction Act (IRA) have accelerated the transition and made the US “irresistible” for clean energy investments. But with more than USD 374 billion in incentives, many countries are looking to attract capital for large-scale clean-energy projects.
The path to 2050 is terms of cost, scope, ambition and complexity, and the multi-faceted risks to the renewable energy sector and global insurance companies, including If Insurance, are projected to be significant in the years to come. According to the Bloomberg NEF New Energy Outlook Report 2022, to reach global net-zero targets, solar installations will need to more than triple and wind installations will need to increase sixfold, for example. In total, the global push to reduce emissions is expected to attract USD 196 trillion in investments in clean technologies through 2050.
Challenging headwinds are already becoming apparent. The US has about 900 gigawatts of projects stuck in so-called interconnection queues, where they must be evaluated before they can supply grids, says Leonardo Moreno, president of clean energy at AES. Currently, only 30 gigawatts are connected every year, he said, calling it “a clogged process.” Most of those waiting projects are solar and wind farms. The capital for projects will eventually evaporate if they can’t get connected, notes Caroline Golin, Global Head of Energy Markets and Policy at Google.
On a global scale, an even bigger potential downside to a rapid clean energy transition, however, is that individual nations investing in similar technologies may “create a world that’s entirely fractured,” lowering cost reductions and watering down any truly global response to climate change, said Joseph Majkut, Director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies. The exponential rise of AI will also likely bring new complexities to the renewable energy and insurance liability sectors, both positive and negative, in the years to come.
The big six
Looking at the renewable energy transition and industry related risks in more granular detail, six defined categories are currently seen as being of critical interest from a renewable energy industry risk and insurance liability perspective.
Extreme weather event risks
Renewable energy production depends on natural resources and phenomena, such as sunlight, wind, water, and biomass, which can be impacted by weather conditions, climate change and natural disasters. This can cause fluctuations in production and availability, as well as damage or destroy infrastructure and equipment. Extreme weather is already taking a toll on power grids that increasingly rely on renewables.
Natural disasters and extreme weather events can damage or destroy renewable energy assets such as solar panels, wind turbines, crops, and hydroelectric dams. The insurance industry is already struggling to adapt to a new normal in which losses are now regularly exceeding USD 100 billion a year. Record-high summer temperatures — 1.4C (2.5F) above the historic average — decimated harvests across France and central Europe in 2022, for example.
In the United States, insured losses from natural disasters hit about USD 120 billion in 2022, most of which was weather related, according to data compiled by Munich Re 1). Hurricane Ian which devastated Florida in September, was responsible for about half of that. Including uninsured losses, the total cost of storms, droughts, earthquakes, and fires in 2022 was USD 270 billion.
According to If’s own data, offshore costs, for example, are significant compared to corresponding or similar property losses on land, and the repairs of subsea cables, as well as wind turbines, can be up to twenty times higher. Insurance for wind parks mainly relates to lightning strikes and wind park repairs, which can be challenging due to wind conditions. The use of cranes offshore can also be difficult due to the unpredictability of the wind and the cost of crane hire. Insurers and risk managers will therefore need to evaluate and mitigate the natural hazard risks associated with renewable energy sources and ensure adequate protection and compensation for potential losses.
Technological and innovation risks
Renewable energy technologies are constantly evolving and improving, and many may become obsolete or outdated quickly. This can affect the performance, reliability and profitability of the projects and assets.
Technological and operational failures can cause malfunctions, breakdowns, accidents, or fires in renewable energy facilities, resulting in losses of revenue, property, or lives. Insurers will be required to keep up with the latest developments and innovations in renewable energy technology and assess their impact on existing and future policies and contracts. Increased risks can also be related to new energy industry prototypes where the outcome is deemed unpredictable, as well as certain untested design and built-type projects. The work of If’s risk engineers to mitigate risks together with clients will increase in importance as the sector grows in size, scope and complexity.
Quality and contractors’ risks
The complexity and diversity of projects, which involve multiple stakeholders, technologies, regulations, and standards is also a critical risk factor. Without careful planning, coordination, and communication among all parties involved, such as insurers, developers, investors, suppliers, contractors, engineers, regulators, and customers, any delays, errors, or disputes could result in cost overruns, quality issues, legal and insurance liabilities, as well as reputational damage.
Higher industry demand will require more qualified workers, contractors and sub-contractors who can design, install, operate, and maintain renewable energy systems. However, there is currently a limited pool of talent and expertise in this field, especially in emerging markets and remote areas.
Higher labour costs, lower quality standards, longer project timelines, and increased safety hazards can negatively impact projects. Additionally, there is currently high demand for raw materials and components such as metals, minerals, glass, silicon, batteries, and semiconductors. These critical materials may be scarce or subject to price fluctuations due to market forces or geopolitical factors.
For solar panels, for example, analysis by If has noted that the most common loss is fire, and the most common cause is faulty workmanship. In addition, parts can be obtained fairly easily, but the quality of the parts is often unknown.
The contractual liabilities of the insured are critical
According to If, the contractual liabilities of the insured are critical, regardless of who they are in the contractual chain of a project. To that end, there can be extensive liabilities in the maintenance contracts. In addition, sometimes wind and solar farm operators would like the manufacturer’s product liabilities to be included in their insurance contracts. Furthermore, these farms are primarily operated remotely from hubs, usually from a distance. Hubs can be outsourced to different companies which could lead to liabilities between the companies.
The key focus from the liability perspective is control of the supply chain and quality assurance. A single company can manage their risk through contracts, limit their own liabilities, and at the same time make sure the parties that are liable towards them do not limit their liabilities. But many questions abound. What does the insured manufacture? Is it an essential part? What is the value of the contract? Does a defect in the product impose a significant risk to the whole project and in the future?
Supply chain risks
In terms of the supply chain, the production and delivery of equipment and materials depend on factors such as weather, transportation, geopolitics, and trade policies. Any disruption can cause delays, shortages, or price fluctuations that affect the availability and affordability of renewable energy sources. In addition, the quality of equipment and materials can vary depending on the standards, regulations, and certifications of different countries and regions. Poor quality can lead to lower performance, higher maintenance costs, or safety risks.
Market volatility is another factor. The supply and demand of equipment and materials are influenced by market forces such as consumer preferences, technological innovations, environmental policies, and competition. These forces can increase the risk of instability in prices and profitability.
The production and consumption of equipment and materials can have social and environmental impacts such as human rights violations, labour disputes, land conflicts, resource depletion, pollution, or emissions. These variables can affect the reputation, sustainability, and social license of projects.
Cyber security risks
Significant cybersecurity risks will also need to be addressed. Renewable energy systems rely on complex networks of sensors, controllers, and communication devices that can be highly vulnerable to cyberattacks. Malicious actors can disrupt the operation of renewable energy plants, cause physical damage to equipment, compromise data integrity, and affect grid stability.
Cyberattacks and sabotage can target renewable energy systems and networks, compromising their security and functionality. The primary risk for insurers is the fact that the entire sector is digitalised and remotely controlled. By addressing the potential cybersecurity risks and challenges, as well as by closely collaborating with If’s risk engineers to ensure detailed procedures and policies are in place, companies can ensure their reliability, efficiency, and competitiveness in the global market.
Political, policy and regulatory risks
Renewable energy projects and assets are subject to various regulations and policies at different levels of government and across different jurisdictions. These regulations and policies can change frequently and unpredictably, creating uncertainty and complexity for developers, investors, and insurers.
Regulatory and policy changes can alter the incentives and subsidies for renewable energy production and consumption, affecting the demand and supply of renewable energy. Insurers will therefore need to carefully monitor and comply with the relevant regulations and policies in each market and jurisdiction where they operate or provide coverage.
If’s approach to claims handling
The challenges for the renewable energy sector on the road to 2050 will directly impact insurance companies, which will need to assess, price, and manage these many and complex risks effectively.
Insurers in general will also need to both further innovate and adapt to the rapidly changing needs and expectations of the renewable energy sector, not least by offering tailored new products and services that can support its growth and resilience.
If Insurance, the largest insurance company in the Nordics, can play a vital role in facilitating the transition to a low-carbon economy by providing risk transfer solutions and risk reduction incentives for renewable energy stakeholders.
Claims handling varies depending on business operations, country of loss, the type of loss and other factors. However, If Insurance will ensure the constant flow of information with the client during claims handling, can rely on a cooperation network with local experts worldwide, and is continuously learning from its losses procedures in place to constantly develop and enhance its knowledge.
In addition, If has a dedicated team of specialised claims experts assigned to handle large claims. These include renewable energy experts, turbine experts, experienced risk engineers and loss adjuster partners, for example. If will continue to adhere to the Nordic tradition of reliability, flexibility, and readiness so that it can apply the best claims handling service in each individual severe loss.
- Bloomberg NEF “New Energy Outlook 2022” report
- International Energy Agency (IEA) “Renewables 2022” report
- International Energy Agency (IEA) “World Energy Investment 2023” report
- International Renewable Energy Agency (IRENA)
- “World Energy Transitions Outlook 2023” report
Source: Munich Re, Climate change and La Niña driving losses:
the natural disaster figures for 2022