Green energy: Insuring a renewables future

The growth of renewable energy is driven mainly by two resources – sun and wind. Other forms play a role in specific regions, but tend to be more complex, less standardized, offer lower economies of scale and require larger investments to harness. Electricity from solar and wind should account for almost 50% of worldwide production by 2050 – the “50-by-50” model – while coal is predicted to shrink to just 12% compared with 37% today due to the possibility that coal may be banned or heavily taxed in future, as well as the fact that renewables are cheaper, cleaner and more sustainable long-term [3].

Despite considerable promise, however, long-term solar and wind growth will depend on the evolution of storage and distribution technology. Energy storage, most often with lithium-ion (Li-Ion) batteries, doubled in capacity from 2017 to 2018, exceeding 3 gigawatts (GW). While significant, it’s not nearly enough for future needs, and production will take a while to ramp-up.

Alternatives such as Germany’s “sector coupling” model – whereby electricity is used for heating, transportation and industrial production – effectively bypasses storage. It is considered a long-term solution towards achieving a carbon-neutral society by 2050 [4] without the hindrance of storage issues.

Clearly, the future is bright for renewable energy, particularly solar and wind. But with growth comes a proportional increase in risk and a need for solutions.

As renewable energy technologies, distribution methods and business models evolve, risks keep growing. For example, prototypical or unproven equipment such as specialized blades and gearboxes and new maintenance concepts require constant technical evaluation and more underwriting expertise – for example, in order to benchmark different turbine types. Also, new financing and ownership structures and cost-saving measures impact operational efficiency and may result in challenges to long-term loss performance. If these aren’t perilous enough, climate change associated with more intense windstorms, hailstorms and flood events all make renewable energy a risky business for insurers and investors alike.

Loss trends vary widely by industry sub-segment. For wind, causes of losses are different between onshore to offshore wind farms. With onshore risks, turbines can suffer from gearbox failures which sometimes are associated with costly serial losses and fires which recently have caused insurance claims in the Euro millions, forcing insurers to review their portfolios. Another source of concern are natural perils such as lightning strikes which can cause blade delamination and windstorms which have resulted in turbine collapses.  On top of this comes the constant evolution of technology risk. Larger rotor diameters and tower heights can result in higher dynamic loads and complex vibrations which increase rotor blade stress and impact the drive train. Along with aging equipment, pressure on maintenance budgets and reduced subsidies, these exposures may affect loss patterns and long-term profitability. 

Finally, there are storage and distribution risks like undersea interconnectors which bear the risks of sub-sea cables and battery storage systems (BSS) exposed to thermal runaway for instance when Li-ion cells overheat and catch fire. 

As a growth market, the renewable energy insurance sector has attracted significant capital, leading to a soft market and many challenges for insurers. Premium has developed in line with installed capacity in the industry which has grown at an annual rate of around 8% since 2010. However, recent loss trends in many segments of the renewable energy industry have raised concerns over deductible and rate adequacy. From large hurricane losses to PV plants in Puerto Rico during Hurricane Maria in 2017 to fires devastating onshore wind turbines and repeated theft claims, the renewable energy industry suffers from frequency as well as severity events. Apart from this, challenges include a mix of risk engineering, price modeling, digital distribution and comprehensive product innovations, above and beyond traditional insurance solutions. 

Risk consulting and engineering are challenged by rapidly evolving technologies requiring close monitoring of different elements like new wind turbines being developed and upgraded in ever shorter cycles. Keeping up with international engineering standards as well as certifications for equipment (e.g. type certification) and projects is also challenging.

Predictive maintenance and data analytics will drive innovative concepts for the evolving risks, eventually opening up opportunities for tailored insurance solutions.

Digital distribution continues to be influenced by the smaller size but higher numbers of risks. While utility-scale PV and onshore wind plants can reach installed capacity in the gigawatt range, many installations are on the smaller end which requires more efficient handling. PV and onshore wind continue to be standardized (e.g. through broker facilities and digital trading platforms), larger, more complex segments, like offshore wind, geothermal or concentrated solar power require thorough, case-by-case underwriting.

Recently, there has been an uptake in multiline demand (e.g. marine, liability and engineering) and the tendency to pool them into one policy, as well as an increased interest for alternative risk transfer solutions such as so-called “proxy revenue swaps”.  These are financial derivative contracts offered to wind farm developers and other renewable projects guaranteeing revenue to fall within a certain range regardless of meteorological factors.

Insurance will continue to evolve with the renewables industry as we move forward to a greener, more sustainable world.