Renewable Energy: What's in store for us?

Earth may not be the only planet that sustains life but it’s the only one that we are acquainted with. It has habituated billions of people who came before us and to say it will cater to a billion people more is a statement held true only with the use of renewables. A step towards renewable energy sources is a step towards posterity. While renewable energy is arguably better than the traditional energy resources, it does come with some risks attached for users and providers alike. In such a case, humans, conventionally as risk-averse, might look for ways to deal with the relatively new exposures. This necessitates the introduction of renewable energy products in the insurance industry. 

Renewable energy projects often require extremely significant investments and therefore, insuring for these projects offers a financial safeguard and covers costs associated with damage and delays and help keep the project afloat and profitable. The products are specifically designed to manage the risks and uncertainties involved in constructing and operating renewable energy solutions like solar, wind, hydro, and biomass. They offer a wide coverage for the business inclusive of, but not limited to, concentrated solar power (CSP), and wind and battery storage systems (BESS). Most insurance companies have dedicated renewable energy claim specialists including handlers, loss adjusters and underwriters.  

Below are some of the most commonly offered products in the space: 

PROPERTY INSURANCE

• Construction/Erection All Risk (CAR/EAR) 

As the name suggests, it typically protects against risks during the construction phase of the project and ensures that the investments of contractors and developers is covered. It provides insurance for physical loss or material damage and covers risks such as fire, theft, natural disasters, and other unforeseen mishaps. It can include coverage for solar panels, wind turbines, and other infrastructure. 

• Operational All Risk (OAR) 

Post the construction step, this provides cover against physical loss or material damage to the energy plant once the project is operational and ensures that the business remains ongoing. 

• Delay in Start-up (DSU) 

There are often delays in the start-up of a project caused by construction delays, late deliveries, and other such issues. The insurance covers against such setbacks and helps with the financial downside of not being able to start within the expected timeframe. 

• Business Interruption (BI) 

In the event of an insured event like equipment failure or natural catastrophe and the energy facility is unable to function, the BI Insurance covers the loss of income and ensures profitability during downtime. 

• Machinery Breakdown  

It is a subset of the above products and covers breakdown of key machinery like turbines, solar panels and generators and protects against mechanical failures. 

LIABILTIY 

• Third-Party Liability 

It covers legal liability for accidental loss or damage to other people’s property and bodily injuries arising from third party claims due to construction activities. 

• Environmental Liability 

It insures the liabilities related to environmental pollution that arise from the project and its operations. It is important to comply with the regulations and to manage the environmental claims risks. 

• Product Liability 

As the name suggests, it covers liabilities arising from defective products causing harm or damage. 

OTHER 

• Credit 

Credit insurance for renewable energy works in the same way as other credit liabilities and protects against the risk of defaults from buyers of the energy. It becomes especially important for PPAs (Power Purchase Agreements). 

• Parametric Insurance 

It pays out a determined sum insured against a specific trigger event, for example, a hurricane or a drought. It is well-suited to the renewable energy sector where weather conditions can have a significant impact on performance. 

• Cyber 

With the digitalization of every corner of the world operations, renewable energy insurance is no exception. Cyber insurance can, therefore, help to protect the energy projects against cyber security risks. 

• Political Risk 

Political instability around the world poses a significant risk to the renewable energy projects. With changes in government policies, particularly in growing markets, the insurance provides cover against such risks including expropriation and currency inconvertibility. 

According to a study carried out by Mordor, the renewable energy insurance market sizes around $19 billion and is expected to reach about $23 billion in the next five years. This is almost 0.5% of the global insurance market. The high-end products are usually marketed towards utility or investor-owned scale operations, while the target consumer is also sometimes a small operator with a minimum stipulated installed capacity.  

Although Europe is currently the largest market for renewable energy, recently, the most notable growth was recorded in the Asia-Pacific region with sizeable investments in offshore wind farms in South Korea, Japan and Vietnam. While the renewable energy insurance market has the potential to expand, it has drawn much capital, making it a target market with many challenges for insurers. As such, the biggest insurers in the industry are BKS Partners, Liberty Specialty Markets, Willis Towers Watson, RSA and Swiss Re. 

In India, too, there has been a growing trend and a massive propensity to use renewable energy. The country aims to reach net zero emissions by the year 2070 and to meet almost 50% of its energy requirements from renewable sources by 2030. 

With the world moving towards a greener lifestyle, these renewable energy projects have become increasingly popular. As seen above, the sector has shown rapid growth in the recent years and with increasing growth comes increasing demand for insurance products that understand both the traditional and emerging risks the sector faces, including natural disasters, supply chain failures, equipment disruptions, government and regulatory policy changes, political and global instability. These issues are easy to tackle with a well-maintained insurance programme in place. Insurance for these projects, therefore, helps accelerate repairs and to reduce delays and downtime. Hence, to promote long-term sustainability, the products must be tailored to deal with the unforeseen risks as the industry keeps growing and projects are being developed. 

After all, at actuarial allies, we best believe insure today, ensure tomorrow.