NU Online News Service, Nov. 30, 1:54 p.m.EST

The level of global investment in renewable energy is surging,but as this industry grows, new risks are emerging and firms aretrying to find ways to manage them. Currently, insurance representsthe most common mechanism to transfer risk to third parties,according to a Swiss Re-sponsored report from the EconomistIntelligence Unit.

The report, “Managing the Risk in Renewable Energy,” is basedoff of interviews and an Economist Intelligence Unit survey of over280 senior executives in the renewable energy industry in WesternEurope, North America and Australia. The survey was conducted inJuly and August.

The report comes shortly after Munich Re said insurers can play a vital role in the development of renewableenergy by producing risk-transfer programs and making corporateinvestments themselves, says insurer Munich Re.

According to the Economist Intelligence Unit report, globalinvestment in renewable-energy projects exceeded investment infossil fuel-fired plants for the first time in 2010, “largelydriven by a mix of renewable-energy incentives and politicalpressure to invest in less emission-intensive energy production.”The level of investment in renewable-energy projects jumped by 32percent in 2010, the report adds.

The survey shows that 33 percent of respondents say renewableenergy is highly significant for their business strategy today, but61 percent expect it to be highly significant in three years' time.And 46 percent expect annual growth in their firms'renewable-energy investments of over 15 percent.

The report says wind and solar energy are growing the fastest,with 48 percent of respondents saying they believe growth ininstalled wind-power capacity will be “high” or “very high” overthe next three years, and 47 percent saying the same about solarenergy.

But as the industry grows, risk considerations are coming intofocus. The report identifies eight types of risks confronting thisindustry:

• Building and testing risk—risk of property damage orthird-party liability arising from the building or testing of newplants.
• Business/strategic risk—risk affecting the viability of thebusiness.
• Environmental risk—risk of damage to the environment caused bya power plant.
• Financial risk—risk of insufficient access to capital.
• Market risk—risk of an increase in the price of commodities ordecrease in the price of the electricity sold.
• Operational risk—risk of unplanned plant closure.
• Weather-related volume risk—risk of a fall in volume ofelectricity produced due to lack of wind or sunshine.

Asked what resources companies have used in the past three yearsto mitigate risks, 55 percent of survey respondents replied thatthey used insurers. This outpaced external risk and securityconsultants (51 percent), suppliers to the company (46 percent),government and regulatory bodies (46 percent), investors in thecompany (41 percent) and lawyers/litigation experts (40percent).

Other methods include senior management, the company'srisk-management function, weather-protection providers, emergencyservices and individual business units.

While insurance is a key function to help manage risks, reducingrisks should be the goal of firms in this industry. JanMumenthaler, head of the insurance services group of theInternational Finance Corporation—which is the World Bank unit thatfinances private companies in emerging markets, says, “What we liketo do is instead of having to say, 'Well here's a risk on yourbalance sheet, let's buy insurance to deal with it,' is to workwith them really to reduce risk and mitigate risk as much aspossible.”

The report notes that one general way to reduce business risk isto “take on additional equity investors into a project, or to entera project as part of a consortium or joint venture with otherrenewable-energy developers or financial partners.”

Firms could also choose to buy into renewable-energydevelopments at a later stage to reduce risks, the report says.

Aside from mitigating risks, firms are also choosing to transfersome risks as well. Of the eight risks firms in thisindustry face, insurance was the top risk-transfer mechanismamong survey respondents for financial risk, building and testingrisk, operational risk, market risk and weather-related volumerisk.

Other risk-transfer mechanisms include special purpose vehicles,the top choice for business/strategic risk and environmental risk;financial derivatives; alternative risk transfer, the top choicefor political/regulatory risk; self-insurance pools and captiveinsurance.

As a risk-transfer mechanism, executives interviewed by theEconomist Intelligence Unit point out that many insurance productsare only suitable for very large projects, and are not within reachof smaller developments.