Insurance Market Trends and Key Issues

Many insurance companies have been contributing to the growth of the renewable energy sector, supporting it with insurance products. However, despite the increasing awareness of climate change and continuing expansion of the renewable energy sector, the insurance market for renewable energy began to harden toward the end of 2018. Some insurers withdrew from underwriting specific sectors, whilst others closed their books entirely. This trend has continued throughout 2019 and into 2020, according to major insurance brokers Aon, Marsh and Willis. 

A survey of the insurance industry conducted by Allianz showed that business interruption, natural catastrophes, changes in legislation, cyber incidents and new technologies were the top five business risks in the renewable energy sector. Willis’s 2020 renewable energy review and Marsh’s renewable challenge research confirmed Allianz’s findings citing “several new realities” that the sector needs to embrace. These include geopolitical issues, new risks emerging from climate change, the acceleration of the renewable sector, a hardening insurance market and the increase of index-based solutions. Aon’s renewable energy market outlook 2020 report also confirmed a hardened insurance market where “a sustained period of competitive pricing and increased claims” reduced insurers’ appetites. According to Aon and Marsh’s research, component vulnerability, defective designs, extreme weather damage, large claims at project construction phase, and increasing fire and theft claims are the main drivers for increasing premium rates. Natural catastrophe limits, catastrophe model review, equipment warranties and obsolete technologies are also key issues in the industry.

Icebreaker One for Innovation

But risks and challenges bring forth innovation. Icebreaker One’s “Standard for Environmental Risk and Insurance (SERI)” project works with insurance industry partners and leading research organisations to bridge the data gap between insurance and climate change. The project incentivises climate-ready behaviours and a net zero transition through innovative insurance products. 

Renewable energy plays a central role in the UK’s transition to net-zero. The challenges of the sector and the underlying insurance industry can be translated into use cases for the SERI project which in turn can incentivise the wider adoption of net-zero initiatives and innovative insurance products. 

Use Case 1 – Insuring Flexible Energy Storage Services

Unlike traditional fossil fuel energy, renewable energy depends on natural resources that are out of human control, resources like sunlight and wind bring up availability and stability issues. Limited by high cost, energy storage also presents an obstacle for the industry with some firms being forced to turn off their generators when the grid exceeds its capacity. 

Flexible energy storage services offer a solution allowing renewable energy systems (home or commercial) and electrical vehicles (EV) to fully utilise their energy storage systems (hydro, thermal and batteries) by exchanging energy with the grid.  They act as individual suppliers or virtual power plants, storing electricity in their system at low demand periods and supplying electricity to the grid during periods of high demand. 

Aon and Marsh have reported large claims caused by construction errors, poor maintenance and bad risk management in renewable energy projects. This largely limited insurers’ appetites in the sector, especially in battery energy storage systems (BESS), Anaerobic Digestion (AD) projects. While the concept of a virtual power plant is still in its infancy, large claims and unknown risks are preventing the uptake from the insurance industry. 

An innovative insurance product for flexible energy storage services that utilises open data and shared high quality data between stakeholders (such as manufacturers, contractors, operators and insurers) could potentially break through the obstacles faced by the industry and help the renewable industry to better transfer risks and attract more investment for future development.

Use Case 2 –  Data-driven insurance products

Large claims and unclear performance of new technologies but upward pressure on the premiums of the renewable energy insurance policies are hardening the insurance market and driving away investment. This is especially true for small and medium-sized projects.

Claims can be caused by the unclear robustness of new technologies and increased failure rates of relatively untested components. Limitations in the skills and knowledge of people working in the industry, such as lack of awareness of correct installation practices also contribute to claims. 

Many of the lesser-known risks associated with renewable energy projects are present at all stages of construction and operation. The long list includes the reliability of catastrophe models, manufacturer designs and test results of assets, training and capability of construction contractors, critical updates of technologies, assets operation and maintenance procedures.

The inability to access key data lies at the heart of the problem. The insurance industry is unable to access essential asset-level data in the renewable energy sector such as breakdown data that may only be shared within a closed industry group.

Working with our partners and stakeholders in the renewables sector, we have outlined a  process to develop data infrastructure and data standards for innovative data-driven insurance products. These products will allow stakeholders to collaborate, collect, process, and share more reliable data, feeding this data into catastrophe models for more reliable outputs. The data will also aid in producing more realistic underwriting, fairer insurance cover and contribute to the softening of the renewable insurance market.

Use Case 3  Insurance products for older and smaller renewable firms

Renewable energy innovation is progressing at a rapid pace and older legacy systems, especially small systems, now are facing little or no insurance coverage. This is partly due to manufacturer insolvency, lack of parts or the ending of manufacturer warranties. 

Uninsured assets could potentially be abandoned due to the heavy financial burden caused by maintaining breakdowns. These abandoned assets can be costly to remove and most of the materials will end up in landfills according to Inside Energy. What’s more, they could risk becoming a potential blot on the landscape, adversely influencing people’s view towards renewable systems

For example, small onshore wind farms older than 5-7 years in the UK can struggle to get any insurance cover, despite the average lifespan of a wind turbine is 20-25 years. The cause for this issue may be linked to the warranties of the wind turbines. In the UK, 12% of the total 737 operational onshore wind farms are over 10 years old and with less than 1MW capacity. This problem is not just limited to wind turbines. Many older biomass energy systems located in British farms are facing similar challenges. There is an urgency to resolve this problem.

A solution lies in a government-backed scheme or insurance product that encourages small renewable project operators to upgrade components such as new wind turbines and more efficient power generators. If system components are upgraded then system warranties can then be extended. 

Use Case 4 – Government Policies to spur long-term growth

Both the renewable energy sector and renewable energy insurance industry structure their business and underwrite policies within the legal framework shaped by government policy and regulation. Long-term policies, therefore, have the power to secure the future of the sector.

We hope our work on data infrastructure and data sharing standards can provide a better insight into the mechanisms of both the renewable energy sector and the insurance industry and how they interact.

This insight can inform the UK government and aid it in forming more effective long term policies to sustain the growth of the renewable sector. Reciprocally, the renewable energy sector will assist the UK government in delivering its net-zero targets in a safe and productive manner.

We are currently collecting use cases in the renewable energy sector. If you can help us with our research or would like to learn more about Icebreaker One’s SERI project please contact us: partners@ib1.org

In response to the Paris Agreement, the UK has pledged to bring greenhouse gas emissions to net-zero by 2050, becoming the first major economy in the world to pass net-zero emission laws. The UK’s ability to reach its goal will be highly contingent on its ability to reduce emissions stemming from homes and offices, driving cars, growing food and energy generation.

 Figure 1 by the Energy Saving Trust provides an understanding of the scale of this goal, with the heating of buildings through the burning of fossil fuels and use of natural gas being the greatest contributor to current UK housing emissions. The transport sector is the second largest emitter. 

At present, carbon capture, utilisation and storage (CCUS), is an important emissions reduction process but with carbon removal technology showing slow progress, CCUS is seen as less effective than rapidly progressing and scalable forms of renewable energy such as wind and solar.

 But, for the 2050 net zero targets to be reached, renewable energy needs to be used on a much larger scale, providing a sustainable source of heating for homes whilst reducing heating emissions and increasing energy efficiency. What’s more, renewable energy should play a wider role in the electrification of vehicles as well as transport fuelled through hydro and biofuel. 

In this blog we will delve deep into renewable energy, with a focus on wind energy and its main uses. We will assess the underlying funding and insurance mechanisms before finally looking into the potential risks and barriers to adoption. 

The “Build Back Greener” targets

Last month, the Prime Minister set out new plans to Build Back Greener with a vision to make the UK the world leader in wind energy. An investment of £160 million will be made available to upgrade ports and infrastructure across communities in England, Scotland and Wales in a bid to expand the UK’s offshore wind capacity, which is already the largest in the world. The funding is intended to create tens of thousands of jobs both directly and indirectly, while reducing carbon emissions. 

In the new plans, the government’s previous 30GW wind energy capacity target is proposed to raise up to 40 GW by 2030 to fulfil the Prime Minister’s ambition to power every home in the country with wind energy (calculation based on current household electricity usage). In response to the target, a few days ago, a multimillion-pound underwater energy “superhighway” was agreed to be built by Scottish Power, National Grid and SSE to bring Scottish renewable energy to homes in England. 

According to the UK renewable energy planning database, there are 737 onshore wind farms in operation across the UK with 13,327MW electricity capacity plus 41 operational offshore wind farms with 9,693MW capacity – the largest in the world. This gives a total maximum operational capacity of over 23 GW of electricity in the UK according to Statista.

The 1.2GW Hornsea One offshore wind farm, comprising 174 large 7MW turbines, is currently the largest in the UK. In order to achieve its 40GW offshore wind capacity target, the UK needs to build at least 25 more Hornsea sized offshore wind farms, or 60 more 500MW capacity medium sized offshore wind farms. In other words, more than 2,400 large turbines with 7MW capacity have to be built in the next 10 years, a huge feat.

The ‘world’s largest wind farm’, Dogger Bank Wind Farm is currently under construction off the Yorkshire coast. With the world’s largest wind turbines (Figure 2), its capacity can reach 3.6 GW.

Government policies and initiatives

Over the last decade, the UK government has set up a series of funds and policies to support the renewable energy industry, such as renewable energy innovation funds,  smart energy systems fund, Clean Growth Fund, Urban Community Energy Fund. To encourage domestic small renewable energy generation, the UK government has also opened a number of incentive schemes such as Smart Export Guarantee,  Feed-in Tariffs (now closed) and the Domestic Renewable Heat Incentive (RHI) which offer homeowners money towards the electricity they generate as well as towards the renewable heating costs of their home. 

As a result, the UK has made great progress in its low-carbon energy transition. In the first two quarters of 2020, 47% and 44.6% of the UK’s electricity generation have been from renewable energy sources, a 10% increase from the same period in 2019 (Figure 3), within which wind energy occupied 20.6% contribution, nearly half of total renewables.

Where is the industry?

A map showing distribution of various renewable energy technologies that are either active, in construction or awaiting construction in the UK, based on the 2018 Renewable Energy Planning Database Monthly Extract from the Department for Business, Energy & Industrial Strategy (BEIS) can be found here (created by Andrew Crossland). On the map, renewable energy technologies are grouped into wind, solar, hydro, geothermal, energy storage and other renewables.

Challenges in the sector

Growing public awareness of climate change issues and the emergence of net zero targets, rapid advancement of technologies, favourable government policies, incentive schemes and rising investment interests have largely spurred on the growth of renewable energy on a global scale. However, the renewable energy sector is still facing significant challenges from political, financial, environmental and social pressures.

●Renewable energy sources are mostly dependent on natural resources that are not controllable by humans such as solar radiation, wind, and waves. For example, the strength of wind and sun may change quickly and are not always available. This leads to energy availability and power stability issues.

●Very specialised new technologies at various development phases are involved in all stages of renewable systems. They can be very expensive. Some projects remain vulnerable to mechanical and electrical breakdown in a period of continued technical innovation.

● Renewable energy plants are often sited in areas more exposed to natural disasters, e.g. offshore with greater frequency of wind and waves in coastal environments. These sites can become increasingly vulnerable under the impacts of climate change.

● Long-term growth of the renewable energy sector relies on consistent long-term government incentives to encourage investment.

Insurance to transfer risks and support investment

Unlike low carbon, renewable energy is not risk free. Insurers are experts in measuring and managing risks. With their unique insight into the challenges and opportunities facing the industry, they play a crucial role in providing effective risk management, manufacturers’ support and security for investment in the renewable energy sector.

Take wind energy. Through providing financial protection to risks from ocean transit, delays or damages during the fabrication, transport and construction stages, breakdown or business interruption during operation to liability associated with third parties, the insurance industry supports investment for the renewable energy industry to maintain its long term sustainable development.