Challenges ahead as complex risk of renewables drives up costs

'The positions taken in support of clean energy often traverse both the traditional risk transfer and corporate investment decision.’  Steven Munday, global renewable energy leader at Willis Towers Watson.

As investment in renewable energy grows, climate change and complex risk could make certain technologies unfeasible for insurers to cover.

Governments and business are now under more pressure than ever to support the transition to renewable energy. And many insurers, if not already publicly committing to reducing their support for carbon intensive industries, are seriously reconsidering their portfolio commitments, seeking to reconcile against social and corporate responsibilities.

Swiss Re announced in February 2020, its plans to cut business support in underwriting and asset management to the world's 10 percent most carbon intensive oil and gas producers by 2023. Similarly, Munich Re recently announced its 2019 sustainability achievements in which it invested €1.6 billion in renewable energy. But what effect is this widespread push for sustainability having on the renewable energy market and the insurance industry supporting it?

“Increasing awareness of climate change is certainly putting pressure on governments globally to consider their investment strategy, this in turn is helping to drive investment in the sector”, said Steven Munday, global renewable energy leader at Willis Towers Watson.

“Climate change is creating increased volatility and uncertainty when assessing risk, which is converted into increased cost. Therefore, climate change, together with an adjusting insurance market, are contributing factors in making renewable energy projects more expensive to insure,” said Munday.

Some forms of renewable energy are significantly more expensive to insure than others, presenting challenges for insurers, according to Munday who flagged concentrated solar power (CSP) as a technology that has led industry losses.

The more nascent technology of floating offshore wind comes with its own complications. “Floating offshore wind is substantially different to onshore wind which has a proven track record, personnel and methodologies. Delivering any technology in a wet risk environment is inherently more complex and more costly,” said Munday.

Insurers are now seeing growing demand for weather exposure protection from energy companies and Muday noted that solar power projects are one the most susceptible to weather related damage with hydro power stations at the far end of the spectrum.

But, extreme weather is not the only risk that renewable projects face, cyber attacks now pose a very real and present danger.

“Cyber incidents such as malware on operational systems can cause companies to reduce production and stop communicating with others in the value chain. For instance if the grid is not able to communicate with a wind farm they will not accept their power as they cannot guarantee the integrity of it,” Myles Paul Milner, global renewable energy broker, told Intelligent Insurer.

“At the highly malicious side of the spectrum is the potential for physical damage to occur, this is more likely to occur in wind power due to the greater usage of mechanical components. The insurance market is now seriously reviewing where this risk sits in the market.”

In October 2019, a cyber attacker hit Utah-based wind and energy provider sPower, the company became the first US renewables provider to fall victim to a cyber attack. The attacker is said to have used a vulnerability in a Cisco firewall to break the connection between sPower's wind and solar power generation installations and the company's main command center.