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Climate change risk considerations for energy and power projects

This article looks at how the energy and power sector is facing the twin challenges of managing the impact of climate risks on operations while also seeking new and renewable energy sources.
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By Andrew Herring , 

CEO, Energy and Power, Marsh Specialty UK

17/01/2022 · 6 minutes read

Climate change is at the top of every risk professional’s agenda, with the energy and power sector facing the twin challenges of managing the impact of weather risks on operations while also seeking new and renewable energy sources. Many of these resources, by their very nature, are in areas prone to weather-related exposures. This raises the question of the impact climate-related risk can have on energy and power projects and how risk managers can assess, mitigate, and transfer these risks in the years ahead.

Natural disasters impact infrastructure

Natural catastrophe events in 2021 have served as a reminder of the devastating effects weather-related risks can have on communities and businesses around the world, with several having a direct impact on energy and power projects. 2021 saw wildfires in the US, Canada, and Europe, above-average hurricane activity in the Gulf of Mexico, floods in Europe, and prolonged droughts in Latin America and the south-eastern US. Water levels in the Hoover Dam — serving 25 million people — reached an all-time low.

Sometimes the less visible impacts of climate change represent real risks to projects. The melting of permafrost in the Arctic is putting infrastructure in the region at risk, threatening the sustainable transition of Arctic communities. Hailstorms can cause costly damage to the panels used in solar farms while exceptional rainfall can lead to subsea landslides that damage pipes laid along the seabed.

The increasing frequency and severity of weather events is having a huge financial impact on corporations. Natural catastrophes caused estimated global insured losses of $105 billion in 2021, the fourth highest since 1970. Hurricane Ida alone is likely to account for at least $30 billion of this insured loss, with the economic impact far exceeding that total.

Projects put at risk

There are many examples of the direct impact of weather risk on energy and power projects. When Hurricane Harvey struck Texas in 2018, many projects under construction in the area were impacted. While sourcing material locally may have been considered to limit the exposure to long supply chains during construction, the wide area of impact resulted in project sites, laydown yards, and fabrication locations all being affected simultaneously. The lead times to secure alternative equipment and pipework from other suppliers were extremely lengthy. Despite huge efforts being made, delays to projects were inevitable and significant additional costs were incurred.

Hurricane Harvey’s impact did not stop there. Even when it was safe to return to the project sites, some contract workers did not do so for many weeks; many, understandably, were focused on repairing their homes and securing the safety and wellbeing of their families. Further costs and delays ensued.

Workforce challenges are usually a significant risk for energy and power projects when a natural catastrophe occurs. During Hurricane Ida in the late summer of 2021, severe damage to an onshore heliport resulted in significant delays in bringing offshore oil production back online, as it was physically impossible to get workers on site. The financial impact of the delay was immense. As it affected production of two million barrels per day, at a cost of $80 per barrel, a week’s delay represented some $1 billion in lost revenue.

Where older assets are still in use, protection may be less robust and the consequences of a weather-related loss can result in plants becoming irreparable. America’s longest running oil spill was caused by damage to pipelines and wellheads caused by subsea landslides resulting from run-off from the Mississippi River following 2004’s devastating Hurricane Ivan, continuing to this day with some wells still needing final plugging.  

The risk of pollution exposures caused by climate-related events are of particular concern to pipeline operators. Excessive rainfall can cause damage that may rupture pipes at river crossings. And other weather risks, such as drought and wildfire, can result in huge liability exposures for companies operating in the energy and power sector.

New hazards

The risks to energy and power projects are evolving as the landscape changes. The industry is well aware of the need to adapt and find ways to build resilience going forward, both to protect its own assets and balance sheets and to be able to answer the demands of investors, customers, regulators, and other stakeholders.

As the sector pushes forward in the race to replace hydrocarbon energy sources with renewable, sustainable ways of producing energy, it is highly likely that participants will need to develop projects in regions that have exposure to climate-related events. Clients have said that potential sites for these new energy projects frequently are in areas prone to weather risk; floating offshore wind farms for wind power generation are one such example.

How risk can be reduced

There are steps that energy and power operators can take to help mitigate the risks posed by climate change. These include:

  1. Installing transmission lines underground to avoid the challenges posed by vegetation growing near cables. While the initial outlay for such projects may be greater, in the long run, the measures may result in lower costs and reduced exposure. Similarly, many offshore oil operators are opting to install much of their equipment on the seabed, rather than on structures with exposure to wind or waves.
  2. Enhancing business continuity planning in order to take into account supply chain analysis and operational recovery strategies. Scenario analysis can help to assess weather risk and resilience across a range of potential outcomes. This all can be embedded into enterprise risk management programmes, giving risk managers the tools to identify responses.
  3. Physical risk modelling to build a picture of a company’s climate-related risks.
  4. Considering insurance — and if traditional insurance options are not cost effective — alternative risk transfer. The insurance market is adapting products to help companies transfer some of their weather exposures. The reality is that for some risks, insurance has become less economically viable as rates rise and coverage narrows in response to large losses. Most offshore operators in the Gulf of Mexico no longer buy insurance in the open market for their windstorm exposures, for example. But there have been recent innovations that can offer risk transfer solutions for energy and power projects. Parametric solutions that pay out automatically when a pre-determined trigger is met can offer coverage for operations in hurricane-affected regions, or for the risk of damage to solar panels from hailstorms, for instance.

Need for long-term solutions

Looking to the future, it is clear that for businesses of all types, building corporate weather resilience is key. Thinking about climate change risks needs to be strategic and long term. A site currently not exposed to wildfire risk, for example, may become so in years to come, after a period of prolonged drought. Sophisticated risk modelling techniques can help provide a better understanding of a project’s vulnerabilities to weather events, both now and in the coming years. It is recommended that weather risks are embedded into enterprise risk management programmes that consider potential exposures over many years, rather than the typical 12- or 18-month timeframe. Resilience not only needs to be built into the energy and power projects of today but production in the future as well.

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