By Katie Wilson ,
Renewable Industry Specialist
18/07/2023 · 6 minute read
The energy transition is moving ahead at a rapid pace as momentum builds towards achieving net-zero commitments. With the introduction of clean energy policies and incentive schemes by many governments around the world - such as the Inflation Reduction Act (IRA) in the US, Green Deal in Europe, and the UK’s Powering Up Britain – there is an influx of investment for clean energy projects and energy security infrastructure.
In 2023, global investment in clean energy — including renewable power, nuclear, grids, storage, low-emission fuels, efficiency improvements, and end-use renewables and electrification — could reach US$1.7 trillion. Low-emissions power generation is expected to account for almost 90% of total investment, with investment in solar alone potentially reaching more than US$1 billion per day.
Notes: "Low-emission fuels" include modern liquid and gaseous bioenergy, low-emission hydrogen and hydrogen-based fuels that do not emit any CO2 from fossil fuels directly when used and emit very little when being produced; "Other end use" refers to renewables for end use and electrification in the buildings, transport and industrial sectors. 2023e = estimated values for 2023; CCUS = carbon capture, utilization and storage; EV = electric vehicle.
Source: IEA (2023), World Energy Investment 2023, Paris, License: CC BY 4.0
Expansion on this scale means that many projects may be concentrated in locations with high exposure to natural catastrophe activity. Further, this steep growth trajectory is putting pressure on the resources required for the planning and development of renewable energy projects, creating bottlenecks that extend development and construction timelines as well as increase project costs. Many projects utilize debt and tax equity, creating higher demand for independent lenders’ advisors (ILAs). Nearly all projects purchase commercial insurance, increasing demand for a limited supply of insurance capacity. Lastly, project developers compete for limited interconnection availability that is bound by its own growth constraints. Industry leaders have expressed concern that the interdependencies of these crucial resources may create an inability to respond to the scale of investment, and pace required to accelerate energy transition to support decarbonization and net-zero goals.
There are several critical milestones and success factors during the development process of renewable energy projects, including proactive risk management, securing financing and insurance coverage, and finalizing numerous agreements and contracts. In order to manage these obligations, lenders and developers typically engage ILAs to help ensure the projects and related investments have adequate insurance that is reasonably available in the current marketplace. But despite new entrants, there remain a limited number of qualified ILAs to advise on the thousands of projects now in development. Project volume is ramping up faster than staffing for these critical roles, often creating delays during the development process — especially for new entrants or those whose projects require coverage at levels beyond what the insurance market or their broker can reasonably provide.
Connecting projects to the power grid is also proving challenging. As an example, according to the Lawrence Berkeley National Laboratory, the US currently has approximately 2,000 gigawatts (GW) of renewable energy capacity in transmission grid interconnection queues. Wait times for grid connection have doubled from less than two years for projects built between 2000 and 2007 to nearly four years for projects built between 2018 and 2022. Further, developers are facing increasing costs. For example, the Berkeley Lab also indicates that the average interconnection cost for active projects in the queue of US regional transmission organization PJM has increased up to eight times since 2019.
Similar scenarios are occurring around the world. In the UK, renewable energy developers are facing delays of up to a decade to connect new capacity to the electricity grid. The number of applications has risen from 40 to 50 per year to about 400, reflecting the growth of renewable energy suppliers. In Australia, there have been instances of energy curtailment in order to manage grid capacity. This creates a double risk to accelerating energy transition — a backlog of new generation waiting for connection and energy produced from clean sources not even being fed into distribution network.
Since renewable energy projects are often situated in locations highly exposed to natural disasters — such as wind storms, floods, and hail — developers also need to keep in mind the cost and availability of natural catastrophe (NatCat) insurance coverage. Despite more entrants than exits, underwriting discipline among insurers is increasing, with emphasis on improving results and sustaining these outcomes amidst rapid technological innovation and deployment. Additionally, the volume of individual non-recourse financed projects competing for a finite amount of NatCat capacity is up considerably, outpacing increases in supply from commercial insurers, on a per project basis.
Many insurers rely on reinsurance for managing the NatCat exposure on their portfolio. Reinsurance markets are also reacting to increased exposures: Loss-free NatCat treaty renewals for the year to July typically increased by between +10% to +50%, with loss-impacted clients often seeing higher pricing. Even with the benefit of reinsurance, some insurers will likely restrict the amount of NatCat capacity they offer on any one project, and likely continue to increase rates.
Industry losses may influence restrictions and rates by peril and/or region. Renewable energy developers and operators require a good understanding of their risks as well as mitigation strategies. Sophisticated risk engineering can help insureds secure more optimal coverage for their project, with better limits and scope of cover, at a more cost effective price.
The challenges mentioned above have led to a major dislocation between needed and available insurance capacity for renewable energy projects. However, renewable energy companies can implement risk management strategies to minimize the effect of the constricting supply for coverage, including:
Demand for renewable projects is increasing as the energy transition continues to gain momentum. As they seek to secure adequate coverage, renewable energy developers and owners should invest in a robust risk management strategy designed to help them overcome the potential roadblocks to development. Engaging an experienced broker or insurance advisor early in the process can help developers better understand coverage availability and potential costs, allowing them to make better informed decisions at every step, satisfy stakeholder requirements, and achieve efficiencies throughout the development process.