Embracing the energy transition – navigating the barriers to a more sustainable future

Authored by Liberty Specialty Markets Senior Underwriter, Financial Risk Solutions, London, Elliot Minton

Energy use is by far the main contributor to climate change, accounting for two thirds of greenhouse gasses and the current energy mix is roughly 80% fossil fuels.  Therefore, it is no surprise that by far the largest investment required to reach the 2050 climate goals is in the global power system. This is estimated to account for ~75% of total investment, which is a staggering ~$2tn per year.

This investment won’t just be needed for classic renewable projects, such as wind and solar farms. Major developments in transmission grids and storage systems will also have to be funded. Mobilising this amount of capital and investing in any transition will always be challenging and come with risks. Many of these risks are predictable and front of mind: technology, construction, price and demand volatility. However, many risks are less frequently considered or will spring up along way.

The missing links

Issues with construction and technology are often interlinked. When a potential investor is assessing the risks facing a new development, one of the first questions they ask is whether the project will be built on time, to an agreed-upon standard and price, and eventually return a profit on their investment. Yet each project is different and throws up specific challenges. The Chilean energy system is a good example of how renewable energy generation can struggle to grow without the transmission system or power storage options keeping pace.

Chile’s long, thin geography poses particular problems. Situated in the north of Chile, the Atacama Desert, commonly known as the driest place on earth, has seen a huge growth in solar and wind projects due to its exceptional solar and wind resource. However, it is sparsely populated and separated from Santiago, the capital city where a large amount of energy demand sits, by roughly 1000 miles. The transmission system has been unable to cope with the growth of power generation in the north and this, combined with the lack of power storage options, has resulted in northern power projects facing significant curtailment, periods of negative pricing and ultimately a large amount of ‘power dumping’. This risk can understandably discourage both debt and equity investors in these projects.

We (almost) have the technology

King Canute and renewable energy investors have faced the same issue: we can’t control the elements. In an ideal world, wind farms would spin under a steady breeze and solar farms reflect endless sunbeams. But Mother Nature does not work that way.

Nature’s refusal to match energy production with human energy demands has resulted in regular gaps. These gaps occur between high production in the middle of sunny and windy days, and high demand during dark and cold nights. These gaps will worsen as the proportion of intermittent renewable energy production increases, creating the obvious challenge of trying to store this energy from when it is created to when it is needed. The technology, in the form of battery storage, does exist to bridge this gap. However, it has only recently started to become commercially viable as technological improvements have made it more efficient and lowered its cost, much as we saw with solar and wind technology over the past two decades.

No one grid should have all this power

Storage is not the only hurdle to the energy transition. Cables, and the lack thereof, may also tie the industry in knots. Renewable projects, particularly large-scale offshore wind projects, all require a huge amount of cabling to connect them to the grid. The issue of supply and demand imbalances and continued drive for improved energy system stability is also resulting in an increasing number of grid systems being connected, which puts further strain on the cable supply. One current such project is NeuConnect, the first direct power link between Germany and Great Britain, which will require 725km of cables.

As the need for cabling rockets up, demand is projected to outstrip supply by the second half of the decade with cable manufacturers struggling to expand production quickly enough, hence posing another potential limiting factor on the pace at which the energy transition can move.

Insuring a brighter future

The insurance industry has a key role to play in supporting clients on their energy transition journeys. It will take trillions of dollars per year of investment to achieve the 2050 target. Without a healthy, competitive insurance market to support the investments and funding provided via public and private sources, this will not be manageable.

Non-Payment Insurance (NPI), also known as Credit Risk Insurance (CRI), can be used as a tool to alleviate a client’s large accumulation of exposures to aggregated risks, such as technology, country, sponsor or regulatory risks, which will inevitably accrue as they continue to invest in the transition. It can also be used to encourage the investment and financing of nascent technologies by distributing the risk amongst a wider number of participants and has been used successfully on recent BESS and Gigafactory projects. It will be critical in helping companies involved in the transition, such as cable manufacturers, secure the necessary financing by providing cover on loans and working capital facilities.

As the energy transition continues to spread to less developed economies, Political Risk Insurance (PRI) can help investors and financiers get comfortable entering into new, perhaps unfamiliar, jurisdictions with different risk profiles to those their investment and credit committees are used to.

Numerous other areas of insurance will continue to be critical in the financing and development of projects by offering protection against a huge range of risks, varying from extreme weather events to simple human error.

Insurance is key to the global energy transition. It can support clients to manage their risk exposures, provide an additional source of capital, encourage financing into new regions, enable technological development and help crowd-in new sources of funding. Having supported our clients through various transitions over more than a century, and with a wealth of expertise spanning the energy, construction and financial sectors, we feel that Liberty is perfectly placed to help our clients overcome the barriers to energy transition in the combined ambition of achieving the 2050 target.