Clean energy is much more than a climate change solution

Renewable energy is a serious business opportunity for re/insurers that are clear-eyed about the transition to net zero, according to McGill and Partners’ head of renewables, power and energy, Tom Sexton.

Sexton has more than 30 years of energy broking experience, including at Aon and Marsh. “I get a bit frustrated with talk about new energy, new technologies, the energy transition itself to a certain extent, because it’s business as usual in my mind,” Sexton says in an interview with Insurance Day. “The energy sector as a whole is developing rapidly but it’s more an evolution than a revolution.”

The appeal of wind, solar and battery storage lies in the varying pace of technological change.

Sexton says: “Every risk that comes to market is slightly new, but it’s always based on something that’s gone before, which makes it exciting and interesting. The whole energy space, but definitely renewables, is a sector you have to live and breathe. You can’t just dip in and dip out because you need to go on a journey to help clients navigate the risks of evolving technologies and get the best products out of the insurance market. You must be fully immersed in the sector to stay abreast of the changes.”

A development Sexton recently helped spearhead at McGill is bespoke catastrophe models for offshore wind portfolios. This collaboration with Renew Risk is a response to the trend of siting wind energy assets further offshore and, potentially, into highly exposed natural catastrophe zones.

These models will assist both offshore wind clients and insurers to access more efficient risk-transfer capital, Sexton says, and will enable re/insurers to price coverage more accurately, understand asset class aggregations and assess offshore wind’s impact on other lines of business. These were “previously inaccessible” insights, he adds.

Government support

But the pace of growth in renewable energy depends as much on government support as it does on market innovation. “We’ve recently seen a few renewable energy auctions fail around the world and that’s definitely going to put a hiatus on major projects in some countries for a year or two, which is a worry,” Sexton says.

This interruption reflects political pressure from the inflationary costs embedded into projects, which has made them commercially less attractive, Sexton says.

“Auction prices secured on some of the power purchase agreements have gone down while the costs of installing those assets have gone up. That disconnect is a concern for insurers and their clients because the pipeline of projects and risks they thought may be coming in the next few years could be delayed.”

“A lot of the traditional oil and gas insurers have really stepped in and in a very positive, technical way. They’re looking to develop their renewable energy understanding… It’s a fairly balanced situation in the marketplace right now, so things have definitely improved over the past five years”
_{Tom Sexton
McGill and Partners}

There are encouraging signs, however, from the relaunch of wind power auctions in the UK and the US.

The UK held the sixth allocation round (AR6) of its contracts-for-difference (CfD) scheme between March 27 and April 19. The assessment window closes on May 20.

AR6 had the biggest budget of any CfD round to date and saw a range of renewable technologies, including offshore wind, onshore wind, solar and tidal stream, compete for government support. A budget of more than £1bn ($1.25bn) was allocated for the auction, which is a substantial increase from the £227m set for the previous one. The 2023 auction saw no offshore wind project bids because the prices guaranteed were considered too low by developers.

Meanwhile, progress in the US includes two proposals for offshore wind energy auctions off the coast of Oregon and in the Gulf of Maine. The two sales, proposed by the Bureau of Ocean Energy Management, reflect a multi-year planning process that has included engagement with Tribes, local communities, federal and state agencies, ocean users, and stakeholders, to balance the social, environmental and economic factors.

Energy sector success

Insurers that succeed in the energy sector come into it “with their eyes open”, a willingness to be flexible and an ability to add value. “No insurer or client wants to have a bad risk because losses and claims are not going to help them commercialise a sector they’ve strived to develop,” Sexton says.

“There was concern in the early days of renewable energy that insurers were going to be the research and development department of some of these new technologies. That assumption dissipated quite quickly because, on the whole, people want to develop the technology in a commercial and prudent manner and I think insurers have responded well to that.

“Now, there’s a fairly strong collaboration between both sides because it’s in everyone’s interest that the renewable energy sector grows – from a climate change perspective, from a security of supply perspective and for all the other reasons why we need to accelerate the transition to clean energy.”

Sexton warns against seeing clean energy as a short-term opportunity. “Get the best talent you can to understand the technologies and the risks associated with them in the locations they might be in. Try to understand the engineering risks associated with them to manage your exposures. Don’t take too big a line too early and make prudent use of reinsurance protection so you have longevity and build up your statistical background and claims understanding so you can make better decisions,” he says.

As for clients, Sexton continues, they are often experienced power utility and renewable energy companies that have done a substantial amount of due diligence with their new technology, “so by the time they’re ready to engage with the insurance market, a lot of the hard work has already been done”, he adds.

There are typically two types of insurers in the renewable energy market: leaders and followers.

“Those that lead want to understand the technicalities of the risks, to be able to price them effectively and to add value. That attitude is valued by our clients because they want to learn from insurers and educate the insurers at the same time, so it’s of mutual benefit for both parties to work together.

“Then the other type of insurer is providing follow-type capacity. They are prepared to let the others do the hard work, but that’s absolutely fine, because we need the capacities as the projects scale up. Not everyone can find or hire the technical capability required to be a leader, so I don’t undervalue those follow markets at all,” Sexton says.

Plentiful capacity

Insurance capacity for renewable energy projects is “strong” at present, Sexton continues, with a flow of new entrants over the past 18 months.

“A lot of the traditional oil and gas insurers have really stepped in and in a very positive, technical way,” he says. “They’re looking to develop their renewable energy understanding, which goes to hydrogen, carbon capture and the traditional renewable energy technology as well, like wind, solar and battery storage. It’s a fairly balanced situation in the marketplace right now, so things have definitely improved over the past five years.”

Sexton recommends curbing enthusiasm, however, for green hydrogen and carbon capture, utilisation and storage (CCUS). “At the moment, if it comes purely down to value at risk and premiums in the market, the role of these new technologies is overstated,” he says, “because there isn’t much green hydrogen or CCUS in the marketplace.”

He continues: “There’s a huge amount of on- and offshore wind and large-scale battery storage projects are definitely on the march, but I think hydrogen and CCUS have got a long way to go and they’re probably taking up too much of the airtime.”

Re/insurers generally are not looking as far ahead as the potential risks from decommissioning renewable energy assets.

“They are looking at it from a physical loss-type of exposure. We’re now seeing decommissioning of offshore wind farms, for instance, and that is being insured, as well as the liabilities associated with it.

“But, from a day-to-day perspective, insurers are less involved in the long-term ability to recycle material or equipment. I imagine that comes into the environmental, social and governance requirements in their investment arms and less in their underwriting,” Sexton says.

The scale of renewable energy globally is already “huge” and the limitations these technologies face are mostly related to government policy and planning regulations.

“The not-in-my-backyard concerns probably aren’t going to go away, but if you look at some of the offshore wind farm developments, the scale is absolutely enormous and will continue to be so,” Sexton says.

Role for nuclear

According to the International Energy Agency (IEA), electricity generation from low-emissions sources – which includes nuclear and renewables such as solar, wind and hydro – is set to cover all global demand growth over the next three years. They are forecast to account for almost half of the world’s electricity generation by 2026, up from 39% in 2023.

McGill has a team specialising in nuclear energy, which Sexton says is an integral part of the global energy mix. “Nuclear is a very important sector we think definitely has a future role to play, although that will obviously be bigger in some territories than others. It’s something we are looking to develop further, as and when the opportunities arise,” he says.

The IEA’s World Energy Outlook in 2023 showed for the first time demand for oil, natural gas and coal would each peak in each of its scenarios before 2030. Consumption of fossil fuels, however, is unlikely to decline for the foreseeable future, Sexton says.

“It’s a matter of decarbonising the production of those fuels and to transition over time. It would be naive to think it’s going to change overnight. We’re on a journey here. And those climate change targets are, I hope, at the forefront of everyone’s mind to try to reach those 2030 and 2050 goals.”

The main thing for re/insurers to know is they can come into the renewable energy sector with more certainty regarding loss performance.

Sexton concludes: “People are making money in that sector from an insurance perspective and a reinsurance perspective. And I think the growth trajectory is an exciting proposition. But, obviously, come into that sector with your eyes open, be sensible how you do it and provide good, sustainable capacity to your clients into the future.”