Low Carbon Economy

Andrew Williams | 12 years ago

The last few years have witnessed an increase in interest in writing renewable energy business and many in the industry anticipate that the promotion of a low carbon economy will lead to a further upturn in business and employment opportunities in renewable energy insurance.

In meeting its commitment to an 80% reduction in carbon emissions by 2050, the UK government will need to ensure that radical changes in infrastructure and power generation are set in train.  A first step was made earlier this year with the announcement of the creation of a £1bn green infrastructure fund to promote low-carbon cars, renewable energy, green waste projects and a new generation of nuclear power stations.  The government expects the fund to create up to 400,000 low-carbon jobs by 2015.

Given that the renewables industry is already the fastest growing form of new capacity generation in the insurance sector, such unprecedented growth represents a significant opportunity, as well as a new source of risk, for the renewable energy insurance market.

“Any transition will create both opportunities and risks, and moving to a carbon aware environment will be the same,” says Thomas Howe, chief underwriter at HSB Engineering Insurance Limited.

Winds of Change

The European Union’s 20-20-20 climate and energy package includes an obligation on Member States to achieve a 20% reduction in CO2 emissions and a 20% improvement in energy efficiency by 2020.  In the UK, it is likely that wind energy will provide most of the renewable energy required to meet this target.  The UK is already the world’s biggest producer of offshore wind energy and developers are gearing up to deliver an additional 25GW of electricity generating capacity from by 2020.

The challenges posed by working in the marine environment are considerable and there are a number of key risks for brokers to consider when looking at the offshore market.  These include start-up delays, design defects, transport and installation damage, in-service damage and breakdown, loss of profits, employee risks and third party liability.  In addition to the threat posed by natural phenomena, such as the risk of a major storm damaging wind turbines, wind farms may also become potential targets for terrorist attacks.  Moreover, brokers should also make efforts to understand current and emerging technology and check compliance and safety procedures.

“There is enormous activity in the wind and solar power segments.  Many brokers and insurers are active in this area, but the teething pains of new technologies has been a challenge for many.  Insurers must be alert to avoid paying for design and development costs,” says Howe.

A Bright Future for Solar?

The UK’s gloomy climate leaves it very much on the periphery in terms of large-scale solar energy generation although several massive solar projects are currently underway throughout southern Europe.  Despite this, it is likely that green technologies such as solar will be increasingly adopted at the residential level, with rooftop solar panels becoming a much more frequent sight.  As far as the insurance industry is concerned, it is likely that this development will represent a large potential pool in terms of numbers of installations (and thus the amount of people seeking insurance policies for them), but individually may only result in small values and small insurance premiums.  Distributed micro-generation of this type may also create new risk exposures.

“On some occasions, homeowners [may sell] small amounts of surplus power back to utilities.  Are insurance policies going to respond to [and provide cover for] these circumstances? Will there be a broad understanding [in the insurance industry] that this will be a normal residential exposure?” says Howe.

The Nuclear Option

Within the industry, many view an increase in the reliance on nuclear power generation, which produces negligible CO2, as supporting a low carbon economy whilst at the same time offering a means of meeting increasing consumer demand for electricity supply.

Nuclear energy currently supplies around 18% of the UK ’s electricity and there is a global trend toward significant investment in new nuclear build.  Worldwide, 35 nuclear reactors are currently under construction and the UK is expected to commence a programme to replace its current fleet of 10 reactors.

A carbon emitting insured company may also be increasing its investment in carbon emission reduction projects in overseas countries, which can be used under the Kyoto Protocol to fulfil carbon emission reduction obligations in the country where the insured is situated.

“Risks with such projects include the failure of new carbon-emitting technology, delay in the start up of the projects, the geographical location of the project, political risks, and the failure of the project to satisfy carbon emitting criteria,” says Jillian Raw, lawyer and energy specialist at law firm Kennedys.

Green Business

As the demands of the low carbon economy gather pace, industry more generally will also need to look for ways to reduce its energy use.  In many cases, this may require significant capital investment in new plant and machinery, which could bring about new insurance opportunities.  Inherent hazards include the relatively immature nature and instability of the emerging technology.

“The rapid pace at which technology develops means that equipment may have shorter support lifetime and lower expected useful life ranges,  impacting reliability and affecting the cost of insurance covering that equipment,” says Howe.

In a related area, although it may be a difficult concept for many businesses to take on-board, existing buildings or structures that have been in place for several years may become outdated because they are no longer ‘green.’  In this light, the reinstatement value of a property will need to reflect the cost of carrying out energy improvements in any structure that might be granted planning permission and built as a replacement to meet current and future local authority environmental requirements.

How Big is the Market?

Given that a substantial proportion of the UK ’s nuclear reactors will have to be replaced by 2020, if a new fleet of reactors are commissioned to replace the existing 10, it is expected that this would involve a programme of 5 twin reactors being built over a period of 15 to 20 years.  There is expected to be a growth in opportunity for the pool of nuclear risks insurers not only in the UK but also globally. For instance, China is undergoing significant and rapid development of its nuclear power generation capability.

“In addition, the replacement of the UK ’s current reactors will present opportunities as part of a decommissioning programme,” says Raw.

According to some estimates, the annual insurance premium volume for the entire renewable energy sector globally is currently around £250m and is set to grow faster than other industry segments.  This is likely to result in large opportunities, at least during the transition phase, as the lack of commonality of the technology and installations will create a wide variety of risk profiles.  However, beyond this initial period, brokers might be better served by adopting a more cautious approach.

“In the long term, [the market is] perhaps not as big as many may think and many initiatives will not stand the test of time.  As the technology and its day-to-day application becomes more established and the experience more reliable, many of these exposures will find their way into standard policy wordings, particularly in the personal insurance segment,” says Howe.

Working with Insurers

A key challenge for brokers is to collaborate with insurers in seeking to understand the needs of the designers, developers and manufacturers of low carbon technology.  In doing so, brokers must develop skills in the evaluation of innovations and new technologies, in much the same way that venture capitalists do currently.  As the development of new technology gathers pace, brokers should also be prepared to move quickly in working with insurers to ensure the timely provision of cover.

“Brokers need to look at their distribution channel for clients who will invest in technology and if their insurers won’t or can’t provide a solution, expand the conversation quickly with insurers who can.  The time line if the broker is not ready may damage relationships with customers,” says Howe.

In the nuclear sector, much of the engineering and construction work on a new nuclear power plant is not directly nuclear related, but is instead more similar to work carried out by many companies on major projects.  It is also estimated that over 70% of the plant and equipment in the fields of electrical, mechanical, instrumentation and control for a new nuclear plant can be supplied by existing UK manufacturers.

“A new nuclear build programme thus presents brokers with a number of opportunities,” says Raw.

Existing Products

‘Green endorsements’ for both household and commercial risks are beginning to find their way into the UK and EU market, allowing for upgrading buildings and/or machinery to more environmentally friendly technology, albeit with specific conditions and limits attached.

While there are already established markets for renewable power generation, erection and operational coverage for ‘portfolios’ of smaller installations are also beginning to be developed by both brokers and insurers.

A number of insurers are also developing products which are designed to focus on the carbon credit delivery risks associated with carbon emission reduction programmes under the Kyoto Protocol.  For instance, carbon credit delivery insurance, (such as that offered by Munich Re), which aims to deal with risks such as technological performance risk, political risk (e.g. a government taking control over the project in the country where the risk is situated) and insolvency of the project or its financiers, which will prevent delivery of the carbon credits.  In the context of nuclear risks, there has also been mention of the need for insurance of nuclear fuel, particularly as a result of the significant nuclear expansion in China.

“At present the UK relies on Australia and certain African countries for uranium but as the global reliance on nuclear power increases it may be necessary to consider specific insurance products to insure the supply of nuclear fuel,” says Raw.

Looking Ahead

In the UK, it is likely that the continuing recession will have at least a short-term impact on the renewables sector, particularly in terms of a reduction in demand and prices, which may mean that some companies might be less keen to invest in renewable energy.  However, the general view is that there will be no major long-term impact on the industry.

The prospect for ongoing government support is more uncertain.  Although the new Prime Minister has pledged to lead the ‘greenest government ever,’ severe budgetary constraints will mean that some cuts in finance are unavoidable.

Modest cuts of £250m in environmental spending have already been announced and the government seems at best vague on its commitment to investment in renewables.  At this crucial stage the market needs strong assurances that the new administration is willing to abide by long-term commitments, particularly in the burgeoning offshore wind industry.

“Those assurances will lead to finance being channelled into expanding the supply-chain within Britain.  Without them, Britain will be forced to continue to buy in services as it needs them, resulting in delays, unnecessary expense, and exported jobs,” says Andrew Smith, director of energy consultancy London Analytics.

Either way, given that it has been estimated that the UK needs £200 billion of investment by 2020 to provide secure low-carbon and renewable energy, brokers may have to wait some time before fully realising the undeniable opportunities offered by the bold new green era.

The UK Wind Energy Industry at a glance…

Projects – 264

Turbines – 2906

Megawatts – 4577.04

Homes Equivalent – 2559247

CO2 reductions (pa) – 5172238 tonnes

SO2 reductions (pa) – 120285 tonnes

NOX reductions (pa) – 36085 tonnes

Source – UK Wind Energy Database – UKWED

About the author

Andrew Williams