The renewable energy industry could be spending three times as much on insurance every year by 2020 to mitigate risks to projects, says a new report by Bloomberg New Energy Finance (BNEF).
The report, commissioned by Swiss Re, looked at six leading markets for solar and wind, namely Australia, China, France, Germany, the U.K. and the U.S. Depending on the scenario, the report says insurance premium volumes in these markets could increase from $850 million today to anywhere between $1.5 billion and $2.8 billion by the end of this decade.
Drivers of increased demand include growing industry scale, but also the trend to more difficult offshore wind environments and interest in the sector from more risk-averse investor groups, the report adds.
Based on current projections, new renewable power capacity built worldwide between now and 2030 will account for more than $2 trillion in total investment. Of this, 75% or 900 GW of capacity additions will be in the solar and wind sectors, both onshore and offshore, and over half of this will be attributable to the six aforementioned markets.
The growing demand for managing risk in these six markets comes as owners and developers of renewable energy projects are seeking to tap into new sources of financing, including from institutional investors such as pension funds. To make investments in renewable energy more attractive to these investors, BNEF says projects must become less risky, all the way through from construction to operation.
According to the report, offshore wind is key sector where risk management is needed. Besides the technological complexity involved, offshore wind farms are exposed to adverse weather and operate in a very difficult physical environment. Damage, delays and downtimes are not uncommon and can significantly reduce the returns on investment.
Onshore wind and solar projects carry construction and operational risks as well, but the report says they are also likely to become more exposed to new, market-related risks as regulators try to wean operators off subsidies and encourage them to compete in open, competitive electricity markets. These risks include balancing charges, curtailment due to grid constraints, counter-party risk, retroactive policy changes and, more generally, power price volatility. The report says operators may find ways to manage these risks internally but are also likely to make greater use of third-party services as new risk management products are developed.
"The analysis conducted for this report shows that the demand for risk management solutions will grow, partly because the renewable energy sector will simply get bigger, but also because of increasing uncertainty affecting power markets in general," comments Guy Turner, chief economist at BNEF and lead author of the report. "As the renewables mature and become part of the mainstream energy industry, they will need to evolve from an innovative sector where risks are taken on the chin, to one where returns are predictable and there are fewer surprises."