Renewable Energy: Growing Industry with Growing Risks and Insurance Needs

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 are trying to find ways to manage them. Currently, insurance represents the most common mechanism to transfer risk to third parties, according to a Swiss Re-sponsored report from the Economist Intelligence Unit.

The report, “Managing the Risk in Renewable Energy,” is based off of interviews and an Economist Intelligence Unit survey of over 280 senior executives in the renewable energy industry in Western Europe, North America and Australia. The survey was conducted in July and August.

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

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

The survey shows that 33 percent of respondents say renewable energy is highly significant for their business strategy today, but 61 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 in installed wind-power capacity will be “high” or “very high” over the next three years, and 47 percent saying the same about solar energy.

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

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

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

Other methods include senior management, the company's risk-management function, weather-protection providers, emergency services and individual business units.

While insurance is a key function to help manage risks, reducing risks should be the goal of firms in this industry. Jan Mumenthaler, head of the insurance services group of the International Finance Corporation—which is the World Bank unit that finances private companies in emerging markets, says, “What we like to do is instead of having to say, 'Well here's a risk on your balance sheet, let's buy insurance to deal with it,' is to work with them really to reduce risk and mitigate risk as much as possible.”

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

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

Aside from mitigating risks, firms are also choosing to transfer some risks as well. Of the eight risks firms in this industry face, insurance was the top risk-transfer mechanism among survey respondents for financial risk, building and testing risk, operational risk, market risk and weather-related volume risk.

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 choice for political/regulatory risk; self-insurance pools and captive insurance.

As a risk-transfer mechanism, executives interviewed by the Economist Intelligence Unit point out that many insurance products are only suitable for very large projects, and are not within reach of smaller developments.