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While the sun shines
The energy market is finally seeing some real change in Australia, and the rapid rate of evolution presents both opportunities and challenges. However, if you are in renewables, you’ve got to be all in – it’s not a space for half measures.
BY MARTIN WANLESS
While the abundance of sun and vast swathes of open land seem to be tailor-made for renewables in Australia, there has been a reluctance to embrace it at the top – so much so that we were recently named by the head of a think tank related to the United Nations as one of the countries that had “shamefully done nothing” to phase out fossil fuels.
Things are starting to slowly change, however.
Prime Minister Scott Morrison has subsequently said the country needs to get to zero emissions as quickly as possible – preferably by 2050, though not committing to it. Meanwhile, at the end of February, renewable energy was named for the first time as a priority in Infrastructure Australia’s list of potential investments, to the tune of $59bn.
Right now, however, renewable energy has been picking up pace as a new and emerging market. Predictably, it is evolving rapidly – and so too are the risks.
THE EVER-EVOLVING RISKS
From an insurance perspective, weather and catastrophe are significant risks in many sectors, and renewables are no different.
“Global claims experience has shown that the frequency of NAT CAT losses affecting the renewable energy sector is on the rise, and Australia has been no exception,” says Sara de Sampaio-Soares, Liberty Specialty Markets’ National Manager, Energy & Power.
“Given the physical nature and characteristics of solar and wind projects, these assets can be very exposed to such perils. In Australia we are predominantly affected by flooding and windstorm, and also so-called secondary perils of lightning, hail and bushfire.”
Consequently, says Jane Smith, Pacific Practice Leader, Energy & Power at Marsh, there’s been an increased frequency and severity of losses, particularly for solar.
“This has created upward pricing trends, increased retention and reduced capacity being deployed by underwriters,” she says. “However, this has also created opportunity, as new insurers now see profitability in renewable energy and are entering the market.”
As the market grows and evolves quickly, it proves increasingly desirable to many new contracting parties, and another significant risk emerges.
“Industry losses due to contractor error or poor workmanship have increased our scrutiny of contractor and subcontractor experience,” says de Sampaio-Soares. “While we’ve not necessarily been hit with highly technical workmanship claims, even relatively straight-forward incidents replicated across multiple sites and at scale are generating very high-value losses for the industry.”
Depending on the size of the project, getting the right cover can be a challenge, however, and one that requires a broker to have in-depth knowledge of the sector.
Nathan Martin, Senior Account Director at Finsura Insurance Brokers, says, “There’s not a lot of capacity about for projects with assets under $50m – it attracts higher
rates, and you don’t have many markets to approach to obtain that cover.”
HOLDING GREAT STORE
Another area that’s inextricably linked to renewables is, of course, storage.
The number of battery storage facilities worldwide is growing, and Matt Langham, Placement Director, National Power & Utilities Practice Leader at Aon, says they’re frequently categorised with renewable energy generation, given how they complement each other – and presenting another aspect that needs consideration.
“Batteries are most often deployed as a frequency response regulator – that is, storing electricity from power-generating facilities for on-demand deployment to the grid as and when it is required,” he says.
“These projects are now starting to reach a scale that can have a major impact on grid stability, which was one of the previous criticisms of the technology.”
Various developers in Australia have announced some extensive, ambitious battery energy storage system (BESS) projects. However, this technology does bring added risks and challenges that must be managed.
“Globally, the industry has already sustained various BESS fire-related losses, and it has become evident that further developments and considerations are needed to ensure fire protection and loss mitigation of these assets,” explains de Sampaio-Soares.
“According to an expert independent risk-management and design-certification body on BESS technology, over the life of a battery operation, it can be expected that it will be affected by at least one fire. Underwriters are therefore looking for a great deal of reassurance around any operation’s fire-mitigation strategies, as well as spacing and real-scale fire tests.”
Battery technology is advancing quickly, so insurers require significant information to review – but, on the plus side, says Smith, “batteries can positively change the BI profile for a risk as they can reduce the volatility.”
BUT WHAT OF THE OLD GUARD?
Of course, while much focus is – quite rightly – on renewable energy sources, that puts significant strain on the traditional power-generation facilities.
“As traditional power-generation facilities continue to age, so too do the costs associated with maintaining and repairing them,” says Aon’s Langham.
“Many of these facilities are still critical to the smooth operation of the National Electricity Market and power supply, and the method of transitioning safely and sustainably needs to be carefully considered by the industry to ensure future grid stability.”
Insurers, however, are facing growing environmental, social and governance (ESG) pressure of their own.
“We’ve seen insurers issue targets or withdrawal to reduce their exposure to coal-fired power generation,” says Smith of Marsh. “Continuing to attract capacity at a cost-effective level will become increasingly challenging as more insurers determine their ESG stance.”
WORKING WITH ENERGY CLIENTS
To say the energy sector is ever-evolving would be an injustice – it’s rapidly changing. From a brokers perspective, it’s vital to fully understand both your clients’ businesses and the sector as a whole.
“Each client has their particular pinch points,” says Langham.
“Some clients own and construct projects in critical natural catastrophe zones. How do they mitigate this risk in the facility design at the outset, and how do they manage this risk during the project’s life cycle?
“Some clients are contracting
SARA DE SAMPAIO-SOARES, LIBERTY SPECIALTY MARKETS
MATT LANGHAM, AON
unproven, prototypical technology for use in their projects. How do we get insurers comfortable with the technology risk, lead times for spare parts, and the strength of the underlying manufacturer’s warranty? “Other clients may have complex interfacing risks. For example, their preferred site may be some way from the nearest grid connection point, necessitating the need for long transmission lines to get their project to the grid. Bushfire liability risks and a consideration of overall project redundancy need to be considered, as all the project’s revenue may be reliant on a single line.
“It is critical risk advisors are involved at the start of a project’s life cycle, well before contract tendering commences, to help guide clients through the design phase, to ensure a proper understanding of insurable versus uninsurable risks all the way through to contract tendering – and making sure contracts are structured prudently – and then into program placement.” It’s a market, however, that you can’t easily dip in and out of. “It’s a specialised market requiring specific knowledge and commitment to ensure adequate placement in these changing times,” says Martin.
“It’s a broad market that has so many complexities, and it’s constantly changing.”
THE HYDROGEN FACTOR
Australia’s National Hydrogen Strategy aims to position hydrogen as a major player in the energy market by 2030, and it can be expected that significant activity and growth will occur.
“Insurers will be asked to step in to help the transfer of risk for these new projects, be they considered brown, grey, blue or green hydrogen projects,” says Sara de SampaioSoares, Liberty Specialty Markets’ National Manager, Energy & Power.
According to the Hydrogen Council, hydrogen is expected to contribute up to 22 per cent of our global energy demand needs by 2050 (up from four per cent presently), with investments of $11 trillion to be committed during this period.
Matt Langham, Placement Director, National Power & Utilities Practice Leader at Aon, says, “As with any newer form of technology, insurers are more cautious than they would be with proven technology they have experience modelling and understanding exposures, particularly given hydrogen is highly flammable.
“We are spending much time with our capital partners and clients looking to grow in this area, to get them to a level of comfort so we can design bankable insurance solutions that allow projects to proceed.”
LEVELLING THE PLAYING FIELD
Premium funding allows businesses and consumers to pay their insurance premiums in monthly instalments. And it is set for a shake-up.
BY NINA HENDY
Premium funding is a simple and innovative lending product that allows businesses and consumers to pay their insurance premiums in easy to manage monthly instalments.
Using background funding to provide a monthly payment option on every invoice enables brokers to allow clients to make their own decision about what is best for their own cash flow.
“This ultimately benefits the broker too, as data suggests that providing a monthly payment option improves client retention rates,” Daniel Gronert, CEO of Principal Funding says.
The industry was formed to help clients pay their insurance premiums, and only exists due to its highly secure nature. So, if a client defaults on their premium funding loan, premium funders have an enforceable right to cancel the insurance policy, for which a clause is included in the funding contracts.
“While most brokers are helpful in managing the process with us, industry players reveal some aren’t aware of their requirements to cancel without delay,” Gronert says.
