Risk Transfer Solutions for the Renewables Lifecycle

The accelerating transition from fossil fuels to renewable energy is changing the risk landscape for power operators and their investors. Fortunately, risk transfer mechanisms can help stakeholders more smoothly navigate this landscape—and the insurance industry is extremely well positioned to offer such solutions. Today, global insurance markets have more than US$2 billion of capacity available for energy and renewable energy-related risks. And capacity is constantly increasing, as traditional power insurers move away from thermal generation and look to capitalize on the growth of renewables.

Getting projects off the ground

Insurance is critical for the development and operation of energy infrastructure. During the investment and construction phases of an asset, risk transfer solutions can help secure capital, make projects bankable, reduce total cost of risk, and provide all stakeholders with appropriate protections. Insurance can cover everything from delays in start-up, to business interruption, credit, contractual and geopolitical risks, third party liabilities, and natural catastrophe events. The insurance markets’ maturity and understanding of these types of risks is continuously improving as the renewable energy sector grows, and as technologies mature. For example, insurance markets in Asia are fast learning how to evaluate earthquake risk for offshore wind projects.

The key for investors and operators is to ensure their insurance or risk transfer program is cost-effective and mitigates longer-term exposures—which requires a full understanding of the construction, operational, geopolitical, and location risks over the lifecycle of their asset. Climate change, for instance, should be a key consideration as the weather in any given location 20 to 30 years from now will likely be very different from the weather today. Futureproofing decisions in this way about location, equipment, and plant configurations is increasingly demanded by investors, stakeholders, credit agencies, and insurers.

The importance of data

Marsh risk engineers use a data-driven process to achieve a holistic understanding of project risk and support the placement process. Data and statistical models are used to assess risk quality and establish realistic estimated maximum loss (EML) forecasts during project design, construction, and operational phases. This approach highlights possible exposures that are assigned a likelihood and impact rating over the lifecycle of the asset.

A project or site technical risk review (desktop or physical) can then identify the potential for property damage, delay in start-up losses or business interruption. EML modelling calculates the value of the risk exposure which feeds into the technical underwriting report and establishes the parameters for the type and amount of required insurance coverages. Recent experience shows that this data-driven approach can reduce the cost of insurance by up to 30%, which for investors in large-scale projects can mean savings of millions of dollars.

Hedging the weather

Once operational, renewable energy projects have distinct weather-related vulnerabilities that can hinder performance. Solar, hydro, and wind plants do not generate power 24/7. Wind all but disappears during very hot summer days, when energy demand is often the greatest, and wind turbines can also be halted by icing and high-speed winds. Solar panels can be shredded by hail, and entire solar projects have been blown away by a hurricane in the US Virgin Islands. Hydro projects are not immune either: multi-year droughts in the hydro-dominated power markets of Chile and Uruguay forced generators to switch to expensive diesel generation and imports a few years ago. Though large thermal generators also face weather-related challenges, renewables are generally more vulnerable.

While we cannot control the weather, there are parametric tools that facilitate efficient weather risk transfer needed to support renewable projects. Parametric insurance pays out when certain predetermined event parameters are met, rather than compensating for damages. Solutions designed to protect against lack of wind and solar irradiance have been around for more than 10 years, and more sophisticated products continue to be developed as a reflection of both project needs and weather volatility.

The Texas winter storm of February 2021 is a prime example of the need for parametric solutions. Record-breaking cold resulted in 48.6 percent of generation to be forced out at the highest point in the ERCOT power market. Wind resources were especially hard hit. Extreme cold in itself creates problems through increased energy demand, but this time it was also coupled with icing due to unusually low dew points. Wind turbines stopped spinning, gas generators suffered instrument failures, and a major nuclear plant went down due to cold weather-related issues. Meanwhile, demand peaked and power prices spiked from typical ~US$40/MWh to US$9,000/MWh. This forced wind projects to purchase replacement power at exorbitant prices, putting them in survival jeopardy. Most of this exposure was uninsured due to the unexpected nature of the events—in ERCOT, everyone always worried only about summer heat waves.

To mitigate future such events, Marsh is working with several wind generators to develop a new risk transfer product: a parametric solution based on temperatures, relative humidity, and power prices. In this instance, payout for wind generators could be triggered if generators are “frozen out” by freezing temperatures and low dew point temperatures while power prices spike. If implemented, such a parametric solution would go a long way to protect renewable projects and ensure that lending terms are met even when weather and power markets do not cooperate.

Hail is another natural hazard that has impacted a number of industries in the US, Southern Europe, and Australia in recent years. Solar generators were not spared—first by physical damage, and then by the traditional insurance markets which have, in response, either removed hail from coverage or significantly reduced benefits. Parametric solutions stepped in again to offer a risk transfer mechanism that will support the financials of solar projects. Specially designed weather stations have been developed that can be easily and economically installed on-site, and improved hail data are now available from various satellite and other sources. Parametric solutions are designed based on these new and improved data technologies, tailored to each project, and offer payouts as a function of hail size. The transparent and quick payout that parametric solutions offer is key to not only getting projects back into production mode, but also creating a financial bridge needed to meet lending requirements.  

If sufficient data exists to price risk and create an index, parametric solutions can be designed to hedge a wide range of weather and power market risks associated with renewables development and operation. For example:

  • Parametric named windstorm protection can assist solar projects in the Caribbean, where traditional capacity for wind exposure to renewable sources is scarce.
  • Proxy revenue swaps can create a synthetic power purchase agreement between renewable generators and energy off-takers who would like to go green, but are concerned about purchasing energy from intermittent resources. Here, the parametric protection provider takes on all of the risk for both the generator and off-taker: overall volume produced, shape (i.e. fixed volume for each hour), and power price.  
  • Dual trigger rainfall and oil price protection can assist with high cost of replacement power generation for hydro plants during droughts.
  • Capacity performance insurance can help protect intermittent resources against non-performance charges (aka penalties) in the new power capacity market regimes. In recent years, these new regimes have been introduced in the US (PJM, ISO-NE power markets) and Italy as a response to power market failure under extreme weather conditions.

Insuring the future

Clean energy, generated from renewable sources, is the future. But as is the case with any seismic shift in how we feed our electricity consumption, new challenges arise. Traditional and evolving insurance products, as well as parametric solutions, can assist project owners, investors, lenders, and regulators to meet this changing risk landscape head-on.