If you’re being even more diligent than usual about turning down the thermostat or switching off unnecessary lights this autumn, you’re not alone. The UK’s energy system has been plunged into chaos by a perfect storm of market forces.
The wholesale price of gas has skyrocketed during 2021, largely due to a supply shock caused by the economic restart after the COVID-19 lockdowns. In recent years, in an attempt to ease out of coal as an even more polluting fossil fuel, the UK has become heavily reliant on gas for domestic heating, industry and power generation. Yet through a lack of investment in storage infrastructure, we hold less than 1% of Europe’s stored gas – barely enough to meet demand for five days of winter – leaving us uniquely exposed to the supply crunch.
Industrial customers such as large steel makers, chemical plants and manufacturers are already feeling the financial pain of the energy price shock. Meanwhile, smaller domestic energy suppliers have folded, with millions of residential consumers being switched to larger, more financially stable suppliers on higher tariffs.
The answer is surely to increase the diversity of the energy mix through non-carbon sources. In 2020, for the first time ever, renewable electricity generation in the UK overtook fossil fuel generation, with onshore and offshore wind providing more than half the country’s renewable electricity. So, could the UK energy crisis be a wake-up call to accelerate the transition to renewables – for economic as well as environmental reasons?
What does energy sustainability mean for insurers?
Changing weather patterns and increasing frequency and severity of extreme events causes damage to homes and businesses, and disruption to global supply chains. So, we’ll be watching the forthcoming COP26 summit in Glasgow with interest, as governments are asked to submit their long-term goals to address the climate emergency.
Insurers like RSA play an important role both in enabling the transition to a low-carbon economy by insuring renewable energy generation projects – often a prerequisite for lenders – and by ensuring that energy production of all kinds is conducted with appropriate mitigations for environmental impacts.
Our Head of Social Impact and ESG, Laura Spiers, says “Ensuring our returns are sustainable starts with making important choices about our investments. For example, we don’t invest in companies that derive more than 30% of their revenue from coal mining, power generation from thermal coal, or the production or transportation of sands and shales, unless our involvement would support a project that would enable a transition to renewable energy.
We’re also progressively rebalancing the risks we underwrite in favour of renewable energy production. For instance, our Climate Change and Low Carbon Policy position sets our risk appetite on insuring carbon intensive activities .”
As a leading provider of renewable energy insurance, we’re supporting the energy sector as it repositions and invests in this transition. We work with a wide range of businesses in the renewable energy sector, and our appetite extends across four key segments: solar, bioenergy, hydro and wind. In fact, we were one of the first insurance companies to protect off-shore wind farms back in the 1990's. However, insuring the renewables sector poses new challenges for our industry as a whole, evidenced by a hardening market.
Did you know... | |||
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28% of the UK's renewable energy generation comes from solar power | 1% of Europe's gas is stored in the UK | 24% of the UK's electricity generation came from wind turbines in 2020 | 43% of the UK's energy is renewable |
The road to renewables is paved with new risks
Fossil fuel power plants have been developed over decades and the risks involved are well understood through previous experience, design specifications and historical data. But renewable energy technologies, distribution methods and the scale of production are constantly evolving, resulting in increased risk and complexity.
As Richard Hampson, our Underwriting Leader for Construction, Engineering and Renewable Energy, explains, “New types of equipment are entering the market, many of which have a short or unproven track record of performance data, making it difficult for insurers to reliably assess these technologies. For more established technologies, the generation units themselves are getting bigger, and larger projects present different challenges. The geographical location of project sites is increasingly presenting inherent risk features, with the developed sites on available land in areas more vulnerable to natural hazards and catastrophic losses. Project sites situated in challenging locations also makes equipment harder to transport, erect and maintain. Adverse weather can also make it difficult to access site, impacting maintenance schedules or delaying repairs.”
As turbine technology matures, the cost of manufacturing is decreasing but the cost of repairs is rising due to increasingly complex designs and engineering, compounded by a national skills shortage. In order to minimise unplanned equipment failures, digital technologies such as the IoT and AI will undoubtedly play a growing role in the adoption of remote monitoring and predictive and preventative maintenance programmes, while the use of drones will enable remote loss assessments where physical inspections aren’t feasible.
While power generation equipment can be damaged by the elements, there are also risks associated with a lack of weather. The wind doesn’t always blow, and the sun doesn’t always shine, which can create earnings volatility for wind and solar generators. As renewables become more dominant in the energy mix, parametric coverage, based on innovative data analytics, will no doubt become an increasingly important adjunct to traditional insurance in compensating asset owners and operators for losses caused by weather-related underperformance.
Despite all the challenges, we believe the prize of creating a sustainable future is worth fighting for. That’s why we support our customers with strategic and practical risk management expertise, extensive knowledge on the operation, maintenance and protection of renewable energy plants, and disciplined underwriting. Together, we can help smooth the journey towards sustainable energy, whatever the prevailing headwinds.