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Managing the risk of energy investments in a heightened political risk environment

Energy investments face complex political risks, including government interference and geopolitical shifts, impacting access, prices, and supplies.

Political risk is a complicated issue for energy and power companies due in part to the strategic value of their assets to local governments, communities, and economies. And as the range of political risks affecting the sector increases and evolves, the issues have become even more complex.

Factors such as political violence, government interference, civil instability, trade policies, and regulations are impacting energy access, distribution, prices, and supplies worldwide. Traditional political and economic considerations are further complicated by the implications of the energy transition and by shifts in policy from newly elected governments, which have led to a greater focus on energy affordability and security. For investors, these factors, in addition to macroeconomic conditions, have led to a somewhat cautious investment environment.

As investors assess geographical asset allocations while aiming to maximize long-term equity returns, an increasingly important priority is to understand their political risk exposures and use available risk hedging tools, including insurance solutions.

Government intervention and future energy demand

Government intervention in the energy and power sector is not new, but its extent and nature are evolving. Government policies may restrict gas and oil imports; directly intervene in energy exploration and production; mandate energy mixes and impose sanctions; and prescribe local content requirements aimed at bolstering the local economy. Such measures can influence the development, operations, and overall viability of energy projects.

The prices and quantities of electricity generated from renewable energy projects are also subject to government intervention. Revenue and investment returns for these projects may be influenced by government policies or regulatory frameworks, such as tariffs or government energy auctions, although changes in government priorities can introduce shifts in policies.

For example, countries with large liquified natural gas (LNG) export capabilities, such as the US, Mexico, and Qatar, may use LNG as a political tool. But any policy changes can disrupt LNG supply and exacerbate market uncertainties.

The investment challenge and potential

Despite a fragmented geopolitical landscape, some investors continue to view the energy and power sector as offering the potential for significant returns. Furthermore, the urgency of the energy transition and government incentives can enhance the appeal of these investments. While obstacles such as country risk, credit issues, and economic or political instability may hinder capital deployment for projects, proactive measures can potentially mitigate these risks.

According to Marsh’s Political Risk Report 2025, geopolitical risks are intensifying operational risk management challenges, with conflicts occurring nearly twice as frequently as in 2005. Conflicts can have widespread impacts for the energy and power sector, including disruption to energy infrastructure and supply chains, and creating instability in energy markets.

Political risk can also manifest as protectionist policies or resource nationalism, including government refusal to grant authorizations to foreign companies or imposition of additional royalties or taxes. Such restrictive measures can deter investments and affect the profitability and operability of projects.

Political risk insurance (PRI) can help to mitigate risk for investors and lenders, such as the risk of loss due to seizure of assets, currency transfer restrictions, or cancellation of concessions.

Power purchase agreements (PPAs) can also reduce financial risks for energy producers and energy buyers (offtakers), including mitigating the fluctuations in energy prices. Often the offtaker is a state-owned entity, and PRI can safeguard an investment from the risk of a defaulting customer breaching its contractual payment obligations under a PPA. For situations where the offtaker is a private entity (such as a corporation), a range of insurance hedging options against the offtaker’s default are emerging within the political and credit risk insurance space.

Managing country risk exposure

For investors and operators, balancing short- and long-term value creation against short- and long-term risks often needs to be rationalized. For instance, despite Africa’s vast renewable energy resources, exaggerated perceptions of political risk can deter investment. However, investors are assessing each country individually, as well as utilizing relevant market intelligence, capacity building, political and regulatory support, and partnerships to help secure financing and mitigate these risks. To help safeguard operations, companies are:

Assessing the impact of country risks using resources such as Marsh’s World Risk Review, which provides up-to-date country risk insights across 197 territories.
Integrating political risk into risk management decisions at an early stage.
Adopting risk mitigation solutions, such as political risk insurance or trade credit insurance.

These approaches can help to better manage country risk, mitigate against the financial impact of adverse political events, and open new investment opportunities.

Energy security for a solar and battery storage facility supplying a third-party mine site

In 2024, Marsh arranged a tailored political risk insurance (PRI) solution for a renewable energy investor involved with investment in a metals mine in Africa. The investor aimed to replace conventional power generation for the mine operation, investing several million dollars in equity, the policy's limit of liability — for a solar, thermal, and battery storage facility. The mine owner was the sole power offtaker.

The PRI was extended to cover the new power project and the risk of government interference at the mine, which could impact project performance and viability. The PRI package included coverage for events affecting the insured’s assets and political risks related to the mine.

As a result, the project reduced local energy costs and increased power delivery certainty for a remote area of the country, while also lowering the mine's carbon footprint.

A balancing act ahead

Looking ahead, the interplay between sometimes opposing forces stemming from the global economy, industry dynamics, political motivations, and business strategies is likely to persist. While the energy and power industry is accustomed to these risks, fluctuations in the energy market driven by geopolitical events can have far-reaching consequences. As such, companies can increasingly benefit from a nuanced understanding of their political risk exposures in their operating regions.

Insurance can also provide a greater level of assurance for investors. Often, insurance is a significant factor in whether a project will proceed, as lenders can require coverage to approve plans. Political risk insurance is one effective way businesses can mitigate risks and provide greater financial certainty.

For more information on the potential impact of political events on your business and actions that you can take to mitigate your risks, please reach out to your local Marsh representative.

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Managing the risk of energy investments in a heightened political risk environment