Risk and insurance implications in the transition to renewable energy
The United Nations Framework Convention on Climate Change held in Egypt, 2022 (COP2T), brought about formal commitment by countries to reduce carbon emissions. Whilst countries plan for the continued reduction of carbon emissions and future net zero targets, they must navigate many obstacles and risks.
The quest for net zero also has impacts on industry. From an insurance industry perspective some have indicated that they will cease to cover those involved with “fossil fuels” by 2030. The impact to that industry will be significant as a result of the position which has been taken by many of the Global Insurers who have taken such a stance.
Current issues impacting insurers’ commitment to net zero emissions
Political pressure and opposition from US Republican politicians including accusations against insurers, that they are violating anti-trust laws, have resulted in at least seven members of the Net-Zero Insurance Alliance (NZIA) leaving the alliance, including five of the eight founding signatories.
See our previous article on this NZIA here.
This is causing concern amongst the climate movement, including the UN and those companies seeking insurance coverage.
Among the withdrawals are Lloyds of London, and in Australia, QBE Insurance. These withdrawals, have created a perception of weakening the net zero emission principle and commitment. Given these developments, a stronger commitment by insurers would be required to achieve net zero by 2050 based on their underwriting portfolios. Insurers who are trying to curb carbon emissions have expressed concerns in becoming entangled in disputes with US Republican politicians. The politicians are pushing back against businesses using environmental social and governance (‘’ESG’’) factors in their decision making. Insurers, however, see this as impacting on their independence to price climate risk in insurance coverage.
At present, insurers, along with the UN climate movement, are actively seeking an orderly resolution to the current climate face-off with the ultimate aim of continued progress in meeting net zero targets.
Transition to renewable energy sources and associated price increases for Australian households and businesses
In Australia, the gradual transition from fossil fuel energy sources (i.e., coal and gas) has seen significant price increases in electricity and gas prices, affecting both households and businesses. With countries around the world, including Australia, committing to net zero emission targets in the future, a push toward renewable energy sources (i.e., green energy) is demonstrably taking place. We know in Australia, key renewable energy sources are available, but not on a large enough scale to meet the needs of households and businesses, and this is evident in the current state of high energy costs.
- Wind turbines
- Solar panels
- Battery storage
- Hydro (Snowy 2.0)
- Hydrogen.
Risks on the road toward net zero emissions
There are many risks to navigate in the quest to attain “net zero”. Critical infrastructure supporting “green energy” presents new types of risk. An evolution is upon us all to understand the implications of new technology. This includes financial cost implications and loss in the event of said technologies’ failure. Insurers will be critical in identifying, managing, mitigating, pricing and developing products to transfer foreseeable risk that green technology presents. The insurance industry has always been an “educator” and “facilitator” of innovation and risk: it will be called on now more than ever to play a critical role.
Infrastructure concerns and supply chain issues
- Motor vehicle manufacturers around the world are on course to reduce production of petrol fuelled cars (e.g. Toyota see article here) or to eliminate them entirely (e.g. Volvo, Volkswagen). In these cases, hybrid, electric or hydrogen gas cars will become available, however, two risks would need to be managed for this transition:
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- Establishing sufficient charging stations or ports to meet future demand both in number and location.
- Supply chain concerns over battery availability. Electric car batteries require rare earth materials predominately mined in China. Given the current geopolitical tensions concerning China’s assertiveness and tensions over Taiwan, future availability of required batteries may be compromised. In response to this, car companies have begun developing supply chains which reduce reliance on China – for example, Tata Group (owner of car marker Jaguar Land Rover) has recently awarded a contract to a UK based company for a multi-billion pound electric car battery plant.
- Solar panel manufacturing requires the rare earth element tellurium; however, China mines the majority of the world’s required quantity of the substance.
- A major significant issue with solar and wind produced energy is the connection with appropriate capacity from battery storage facilities. Battery cells require rare earth materials for their production and with China mining 93 per cent of the world’s required elements, the same supply chain risks are at play here again.
Risks and insurance considerations regarding Australia’s key renewable energy sources
Wind power in Australia currently contributes about 10 per cent of the total electricity supply[1], but is planned to increase to around 50 per cent by 2030[2]. This clearly indicates an intended rapid growth in this renewable energy source over the next few years, aligning with the commitment to net zero emissions for the future.
Many companies in the energy sector, such as AGL, are heavily involved with wind energy. Closely connected with wind energy is battery storage, particularly for those days where there is little to no wind to turn the turbines. Both on and offshore wind farms currently require large scale investment to ramp up development and construction to achieve planned electricity output from this renewable energy source.
Apart from the high upfront costs for establishing on and offshore wind farms, wind energy has a number of other risks to be managed or transferred. These include:
- Wind turbines are complex and would require expensive maintenance parts to ensure efficient ongoing operations.
- Replacement parts for turbine farms, natural connections etc. should be planned for ready availability, as delays result in no electricity generation.
- All wind farms must be designed and constructed for the turbines, fans and network connections to withstand extreme weather conditions (strong gales) and other environmental factors such as bushfires for onshore farms.
- Wind energy considerations must compete with other low-cost renewable energy sources, and may not proceed whenever they are not the most cost-effective renewable energy source.
- Ideal sites for wind farms are usually in remote locations which require readily available access for network operational purposes and transportation needs (i.e., roads infrastructure).
- Need for battery storage facilities whenever the wind is not sufficient to generate energy.
- Available site locations with appropriate wind conditions may need to be at very remote locations, thereby necessitating more expensive network connections to cover the distance from wind farms to populated areas and end consumers.
- Environmental concerns particularly with turbine noise levels and the danger to flying wildlife by the fans.
Currently, solar energy generates about 12 per cent of Australia’s electricity[3]. Within the renewable energy industry, it is expected that solar will become the number one energy source by 2050.
Solar energy does have a number of related risks to be transferred or managed, these include:
- It is weather dependent, extensive periods of no sunshine (and during nighttime) will not generate electricity.
- It is reliant on solar energy storage capacity which is expensive.
- Both solar panels and storage facilities such as batteries are dependent on the availability of scarce earth materials for their production. The risks associated with obtaining such materials from China and their adverse effects on the supply chain have been addressed earlier.
- Costs associated with installation of solar panel farms and with household panels can be high in each case. Government rebates were available to assist household installation.
- Solar panels can take up a lot of space, especially solar panel farms, so the right location allowing for full sun light must always be chosen.
- Household installations may not suit roof constructions and positioning may not provide full sunshine exposure.
- Manufacturing of solar panels requires chemicals (refer to the tellurium article above) which can cause pollution if not properly managed.
- Network connection costs from solar panel farms, storage, grid and to end users will need to be enhanced to accommodate the large-scale energy provision in the future – this naturally will have high costs to provide the required energy level.
This energy source is essential in terms of its connectivity with the renewable energy sources of wind and solar. It becomes critical as a source whenever weather conditions do not allow energy generation from wind and/or solar.
The key risk issue is that China is the main source of the rare earth materials used in the production of solar panels and battery cells.
Battery storage is not stand alone, therefore extensive connection costs are required, due to network structure, to bring energy from this battery storage to end users.
In 2021, energy generated from hydro only supplied about 6 per cent of Australia’s electricity. With the completion of Snowy Hydro 2.0 around the beginning of 2030, this should increase. The inherent features of the Snowy Hydro 2.0 project have identified significant risk factors associated with hydroelectricity energy projects of a large scale. Risks for such high capital expenditure over long durations include:
- Complex project management – components not effectively managed can lead to delays and cost increases.
- Long lead time from project commencement to start of operations. Currently the period is 12 years but more than likely this will be exceeded.
- Significant cost overruns, the project was initially announced at $2bn in 2017 but this has nearly tripled in amount to $5.9bn by current completion date of December 2029.
- With a project this size over years of construction, other risk factors may also have an impact, for example:
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- Secure supply of required project materials.
- Work safety conditions.
- Impact of flooding and bushfires on transport access to the project site.
- Large financial outlay required which resulted in the Australian government being a shareholder of the project by providing $1.38b in equity.
- Unforeseen impacts including the pandemic-induced lockdowns, causing global concerns over supply chain disruptions, delays and cost over runs.
Although currently green hydrogen production is less than 1 per cent of renewable energy sources, it is expected to play a leading role in the transition from fossil fuels to net zero emissions. Hydrogen only emits water when burned and can be produced without the reliance of CO2. Further advantages are that it can be stored, liquidated and transported using various modes from pipelines, trucks and ships. Hydrogen energy usage has significant effects on industries such as steel, petrochemical cement and transportation (i.e. trucks, buses and ships) for decarbonising their operations and reducing CO2 levels.
Production of green hydrogen on a large scale is required to achieve a low carbon future. Such production will require not only high upfront costs, but also the design and development of new technology, including the alignment of existing energy technology. This will present significant risks to be addressed, given the current low levels of hydrogen production which need an exponential increase. The potential for hydrogen energy is great, particularly with Australia also entering into partnership with South Korea for the development of hydrogen energy[4].
The special characteristics in the production of hydrogen create risks which must be managed and considered for insurance purposes, including:
- Green hydrogen projects for undertaking electrolysis need major innovation, design and development to make the process more efficient. Therefore the scope of new hydrogen projects will be complex and more technically challenging to ensure operational efficiency.
- Large scale hydrogen production is still in its infancy and safety concerns for this type and volume of a highly flammable product must be clearly identified in order to fully manage.
- Storage and transport on a large scale is relatively new and needs thorough review particularly for green hydrogen technology that is undergoing rapid change. In such cases the risk environment for storage and transport is very fluid/dynamic and needs constant review.
- Green hydrogen is inherently high risk as it is explosive due to leakages which can cause major concerns in terms of property losses, health and safety and business disruption. Hydrogen production assets must be built to required standards to minimize wear and tear and leakage, and ongoing maintenance is essential to manage this risk.
- Electrolysis required for green hydrogen production must have a constant and uninterrupted supply of electricity. Disruption to electricity supply must be managed with alternate sources of energy to ensure business continuity.
Conclusion
The move to “net zero” presents broad risk, involving government, industry and ultimately the homeowner. There will be twists and turns to navigate during what is unquestionably a rapid process to attain emissions targets. With many advocating a strong stance to quickly abolish traditional and tested methods of energy, what happens if the new technology fails? In the context of industry and risk presented to companies and their boards, to what extent will there be implications for how they have traded, or indeed how they will trade? To what extent is foreseeable risk evident that must be navigated? What are the strategies companies and their board expected to develop? What are methodologies to transfer this risk procedurally, contractually or financially?
Risk advisory and advocacy via intermediaries will be critical here. Not only insofar as assisting companies and their boards to identify exposures, but also to manage them. Critical in this regard, are the solutions conceptualised by insurers who have always led the world in understanding, mitigating and transferring risk brought by innovation and change.
The Team at Bellrock has a broad understanding of risk and work with a range of external experts to bring innovative risk management strategies to companies. We also work closely with insurers to comprehensively identify and manage our clients’ risk, and where appropriate, design insurance solutions specific to our clients’ needs. To discuss some of the innovative risk management strategies and insurance products conceptualised in the wave of new technological developments, please contact our Team via the form below.
[1] https://financialpost.com/commodities/mining/rare-earth-metals-magnets-recycling
[2] https://www.globalaustralia.gov.au/industries/net-zero
[3] https://www.energy.gov.au/data/renewables#:~:text=In%202021%2C%2029%25%20of%20Australia’s,%25%20in%20the%20mid%2D1960s.
[4] https://www.austrade.gov.au/news/media-releases/australia-and-korea-partnering-on-clean-energy
