The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2017 / 2018

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The North Wind and the Sun

Gavin Bradshaw

In Aesop's fable "The North Wind and the Sun" the two titular entities challenge each other to make a passing traveller remove his cloak. The sun ultimately wins, as the traveller wraps his cloak more tightly against the cold wind but is forced to take it off by the sun's heat.

The renewable energy sector has long been derided as something of an eco-liberal fable - and not just by climate change deniers and acolytes of the fossil fuel industries.

Getting political and public buy-in has been a struggle over the years, but the rivals in Aesop's stories are now two of the key players in a segment of the power generation industry that is definitely coming of age.

Utility-scale renewable projects have been gaining ground in recent years, particularly in the solar and wind power sectors. Indeed, the fields of solar panels known as solar photovoltaic (solar PV) arrays, or "solar parks", and the ranks of wind turbines referred to as "wind farms" are two key areas where the capability for generating profitable, subsidy-free power has reached parity with, and in some cases exceeded, conventional power generation methods.

Criticisms of renewable energy have been many, targeting problems with the scalability of technologies, the cost of projects relative to their power generation capacity, the consistency of supply in changing climatic conditions and the difficulty of transmitting and storing energy from often remote facilities.

Of course, renewable energy is not just about generating electrical power. There are solar and geothermal systems for domestic heating and hot water supplies. And a range of crops have been used as renewable sources for bioethanol - one alternative to diesel and petrol-powered motor vehicles and generators.

However, for the purposes of this article, it seems apposite to concentrate on those sectors of the renewable world that lend themselves to large-scale power production and, by implication, the (re)insurance of sizeable industrial assets.

A watershed moment
An International Energy Agency report from July last year stated that global production of renewable energy had increased to around 14 percent of the total primary energy supply in the period from 2013 to 2014, having grown at an annual rate of 2.2 percent since 1990. The agency added that: "Renewables are now the second largest source of global electricity production, accounting for 22.3 percent of world generation in 2014."

As a sponsor of the COP21 conference (also known as the 2015 Paris Climate Conference) Axa Corporate Solutions (Axa CS) describes renewables as "one its strengths" as it puts up "significant and often lead capacity for projects and operational assets".

Its focus on large-cap businesses means its renewables book consists of utility-scale projects and assets, predominantly in the onshore and offshore wind, traditional hydro, solar PV and concentrated solar power sectors.

The firm's renewables experts say that in 2015 the global market for renewables was $350bn, across all types and scales of technology.

Murray Haynes, who joined specialist (re)insurance broker Alesco Risk Management Services (Alesco) in May last year as a partner in its renewable energy division, says there has been "a steady ramp-up" of investment in the underlying industry.

"In the last year there's been around $290bn put into renewables and cleantech, including things like new grids to renewables assets," he says.

Technology is proving to be a significant driver in the ascendancy of renewable generation. As a Bloomberg article highlighted in April this year, the offshore wind sector is approaching the point where large-scale, subsidy-free power can be supplied to the grid at a competitive cost.

German manufacturer Siemens, German power company Energie Baden-Württemberg (EnBW) and Denmark's DONG Energy are hard at work building mega-turbines that could almost double the generating capacity of the most powerful existing models, at up to 15MW per unit.

Jatin Sharma is renewable energy specialist GCube's head of business development, based in California. The carrier is prominent in the on- and offshore wind and solar PV spaces and has a sizeable European offshore wind book targeting the growing markets in Germany, the Netherlands and the UK, as well as Denmark.

"The cost of offshore is three to five times that of onshore wind, so if you apply that to the sums insured, most people have some pretty chunky exposures in the North Sea," says Sharma.

Citing the recent announcement that DONG Energy and EnBW had won a large German offshore windfarm contract, Sharma notes: "The industry is pushing now to stand up on its own two feet without subsidy.

"They're going to compete with wholesale electricity prices. That's a big watershed moment in the industry, because a criticism that's always been levelled at wind power is that it's heavily reliant on government incentives."

Sharma says offshore wind costs per megawatt have dropped significantly in the last five years, by between 30 and 40 percent. "These larger turbines that are more efficient, and where the costs are coming down, are producing a lot more in revenue - so that's what people look at in terms of output and energy production."

Managing general agency Pioneer Underwriters branched out into the renewable energy space in December last year with the hire of Warren Diogo from Ascot as its new renewables head. While the unit is, in Diogo's words "very much in start-up mode" with an initial focus on solar PV, onshore wind, and operational offshore wind, it is targeting the full range of renewable technologies longer-term.

Like Sharma, he has observed a shift in the offshore wind market.

"There are significant cost reductions being achieved in a lot of the current and new developments underway," Diogo says.

"They're already at a turbine size in the range of 6-8 MW, which is a big increase on the projects being developed four to five years ago. You've got inherent challenges around installing larger turbines and that's where the insurance industry needs to evolve in terms of dealing with those new risks." James

James Green joined Novae as renewable energy class underwriter in 2015, after four years as JLT's renewable energy practice leader. Novae's focus includes the more niche areas of renewable energy.

Green says that with new entrants to the market focusing on the more vanilla onshore wind and solar PV business, and some established carriers retrenching towards those same lines, Novae has taken the decision to also target more prototypical and challenging sectors like wave and tidal, bio-energy, offshore wind and concentrated solar power (solar CSP or solar thermal) in order to "hopefully cherry-pick the good risks".

"You have to write onshore wind and solar PV because it's the mainstay of what's out there as well as being the more proven technologies," he says. "But you have to make yourself relevant, particularly when you're a newer entrant like us. If you're only going to do onshore wind and solar PV then you are chasing two sectors where there is already significant capacity."

Green's team writes a lot of UK wave and tidal business, not least because the UK happens to have some of the world's leading test centres for the technologies, such as the European Marine Energy Centre in the Orkney Islands and Wave Hub and FaB Test in the South West.

Global market
Expanding renewable capacity is a global concern. Growth in offshore wind has been fastest in Europe, followed by Asia - particularly China - and the US. Growth in these regions is also being seen across solar PV and onshore wind, particularly in the US and China for the latter.

Click to enlarge Elsewhere, Latin America is viewed as a strong prospect for renewables growth, particularly for onshore wind. Other areas providing new business for carriers include the Middle East and North Africa region, southeast Asia, South Africa, other parts of the Asia Pacific region and sub-Saharan Africa. According to Alesco's Haynes: "What brokers see in London is not necessarily particularly representative of what the world of renewables is doing globally."

He describes the US market as "relatively self-sufficient", adding: "We don't often get approached in London to place insurances for standard wind and solar plants unless they are part of big portfolios or where there are particular natural catastrophe issues."

In addition, he says: "China you don't see much of because the local insurance markets are very well developed. There's a lot of local capacity and formalised treaty arrangements, which means that they can absorb most risks within the local market."

In Alesco's case, he says: "We get the [business] that comes from countries where institutional experience of renewable energy projects and market capacity may be limited, and also where project developers value the advisory experience that we put into project development before the insurances are placed."

Political drivers
Of the 170 national governments that have published energy targets, nearly 150 have enacted policies in relation to increasing the share of renewables. In addition, governments appear to be moving away from a tariff-based system of incentives towards holding auctions for contracts to develop renewable generation capacity.

According to the International Renewable Energy Agency, this is emerging as "an essential policy instrument for many countries to promote the transition to renewable energy sources and technologies" - as evidenced by the 67 such auctions held in 2016.

Maarten Mulder is head of renewable energy at Sompo Canopius, with a book that is dominated by offshore wind, followed by onshore wind and solar. It also encompasses wave and tidal, hydroelectric power, biomass and geothermal, however - all with a strong European focus.

He points to the fact that the environment and global warming have been important political topics on the agendas of many governments, not least since global protocols such as Kyoto were adopted to reduce CO2 emissions.

"Many governments incentivise renewable energy production to achieve these goals and to jump-start this new industry," he notes. "As overall efficiency and cost effectiveness have been increasing sharply in recent years, the need for government support is decreasing and more investors will be interested."

Investment in renewables
According to Axa CS's renewable experts, profitability in the sector is also dependent on the levelised cost of electricity (LCOE).

This is a measure that assesses different forms of power generation by dividing the average total cost for building, operating and maintaining a power asset by the total energy output over its operating lifetime. The LCOE is also used as shorthand for the minimum cost at which the electricity generated must be sold for the project to break even over its time in operation.

Click to enlarge The Axa CS experts say that the LCOE for onshore wind operations is now close to undercutting traditional generation methods.

This is proving to be a tipping point for greater investment in the sector. As Sharma notes: "The biggest shift that we've seen is the number of people entering the pension fund market to finance or re-finance things like large onshore or offshore wind."

Sharma notes that with such investor interest comes a greater scrutiny of what he calls "resource risk".

"Wind has a significant amount of inter-annual variability," he explains. "So we have seen a big increase in interest from clients in buying an insurance policy that protects against shortfalls, above a certain threshold."

Added to this is a surge in interest from infrastructure and pension fund-backed projects and from insureds that have sustained non-damage business interruption losses due to lack of wind, which has subsequently affected their share price and ratings, says Sharma.

Whereas oil and gas companies can typically finance new projects off their own balance sheets, Green says that around 90 percent of the renewables business his unit writes is project finance.

"When I first started doing this 7-10 years ago a lot of the clients were power utilities, whereas for a lot of the onshore renewable energy projects now, particularly operational projects, the clients tend to be infrastructure funds, hedge funds and pension funds," he says.

"They are quite risk-averse and they see these projects as revenue streams. They look to buy quite a lot of insurance so if anything happens to the project and the revenue stream goes down, they can get it up and running as soon as humanly possible."

Saving energy
At this point in the growth cycle of the renewable sector the bread-and-butter opportunities seem clear. Onshore wind and solar PV are only going to get bigger in both project size and geographical spread. Offshore wind is likely to spread further afield, with turbines increasing in size and output.

Surprisingly, given its affinity with large-cap businesses, Axa CS says it is also keeping a close eye on the wave and tidal and offshore floating wind sectors as future areas of opportunity, although its experts concede: "Wave generators, tidal steam turbines and actuators are not currently developed to a scale that fits our market segment and costs are high."

However, the one thing that's exciting everyone currently, and that promises to accelerate development in renewables when the technology is perfected, is battery storage. One expert told sister publication Inside FAC that he is increasingly seeing battery storage technology risks land on his desk.

Axa CS highlights battery storage on a utility scale as a focus of "intense investment in R&D". "We anticipate seeing more large-scale projects or elements of renewables projects with a battery-based storage component," the carrier says. Alesco's Haynes details what's behind this interest. "You are starting to gets grids specifying certain megawattages of battery capacity, so there are now capacity auctions for developers to actually build battery storage units in the UK," he says.

"And in California, for every utility-scale renewable energy plant you have to allocate a proportion of battery storage. Battery storage is going to become significant because it compensates for those intermittency problems associated with renewable energy generation."

It's not overstating the case to say that battery storage is something of a Holy Grail for the renewable sector. Electrical power is extremely difficult to store for long periods, whatever the form of generation, and renewable assets can't simply turn their turbines on and off when they want to generate power, unlike conventional assets.

Green summarises the draw for developers and their insurers as they look to the coming decades of the renewable power revolution: "If you've got North Sea offshore wind turbines spinning 10 to the dozen but you're losing that power because the grid can't take it, then if you have a solution where you can store that energy and release it when the grid wants it, you've basically cracked renewables."

This article was published as part of issue Summer 2017

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