'There isn't an automatic switch" – WTW head on the Southeast Asian energy transition

"There's the realization that this isn't an 'either/or,' or a beauty contest between traditional fuel and newer technologies"

'There isn't an automatic switch" – WTW head on the Southeast Asian energy transition

Insurance News

By Kenneth Araullo

WTW’s Asia Power and Energy Conference was recently held in Manila, and it was attended by a formidable list of energy sector names, the banks behind them, and the insurers overseeing the risk developments. The conference was themed around “energy transition,” a concept that’s not too alien for those who are already deep in the ESG rabbit hole and the brighter, cleaner future that it represents.

As prestigious of an event as this one is, it’s hard not to wonder why, of all places in Southeast Asia, WTW chose the Philippines as its host. Even the firm’s global head of natural resources, Graham Knight (pictured left), acknowledged the fact that the country is still heavily reliant on coal, which powers over half of energy resources in the country. However, in conversation with Insurance Business Asia, he revealed that the Philippines represents a veritable future for renewables in the Southeast Asian region.

“Notwithstanding [the coal consumption], there’s a very strong renewable energy potential here, and the financing that’s available to develop that technology going forward to accelerate the energy transition in the near future,” Knight said. “We’re very much looking at how we can help support clients in that transition and identify the risks that are associated with it, and how we can mitigate against those risks. So, we see the Philippines as a central part of Southeast Asia energy transition planning. It’s quite interesting to note that the investment that is developing in the Philippines around renewable energy probably puts it in a position as a leading country in Southeast Asia in that development.”

That said, like all things in the sector, development will always be reliant on capital, and Knight acknowledged that the continuity of access to financing will be the main challenge for those adopting their own energy transition journeys.

“Whilst the financial institutions and their investment strategies around ESG are well-documented, insurance is becoming the next focus and the scrutiny around ESG. However, I see twofold to this: one is the lenders and financiers’ commitments and acceptance, and the other part, is the insurance capital and risk capital that is deployed to finance the risk transfer element,” he said.

Urging energy companies to develop around their own ESG framework, Knight said that homing in on the “environmental” part will be key to accessing that much-needed capital for transition in the years ahead.

Risks if you do, risks if you don’t

Much of the first half of the conference was devoted to two opposing views: ACEN, an energy firm with over 4,000 kWh capacity, 98% of which is attributable to renewable energy, making it the highest in Southeast Asia; and EGCO, another energy firm that’s mainly powered by coal and other fossil fuels. While both sides presented their own views when it came to energy transition, Knight said that there are still challenges that wait for either faction.

In ACEN’s case, which highlighted the use of energy transition mechanism (ETM) as technology which could potentially change the way in which we de-risk the energy sector, Knight said that there are still barriers around the technology itself.

“We’re seeing many clients in this sector investing and divesting their assets as they try to decarbonize. When they’re investing in newer technologies – be it offshore floating wind farms, or interconnectors, or battery storage, or even hydrogen and newer fuel sources such as ammonia, all of these come with inherent and different risks that are associated,” he said.

Mentioning the way insurers operate on prior data to understand risk transfer availability, Knight said that utilizing something such as ETM means a need for a much more advanced understanding, which in turn comes with different risks, both known and unknown. “This is a time for us as intermediaries and as insurance partners to step up and provide the necessary solutions that those clients are going to need to accelerate the energy transition,” he said.

Of course, while there are inherent risks in stepping out and being aggressive in the energy transition journey, there are also risks associated with an approach that can be considered as somewhat passive, as is with the case for EGCO. While Knight said that it’s important to be mindful of how insurers support clients, especially those who are only looking out for the energy supply in their regions, it’s important to remember that “it’s going to take a combination of things.”

“The reality around the transition phase is that isn’t an automatic switch that we can flick to transition to renewable energy immediately. Coal, in many ways, is a transition fuel itself, and there are technologies around carbon capture, utilization and storage that are being deployed now to scale. That isn’t necessarily a new technology as that has been in existence for quite some time. And it’s understood by the insurance market,” Knight said.

Solutions need to go hand in hand, Knight said, and to support the transition for a cleaner, decarbonized future, there needs to be more understanding, especially as to how insurers can support energy companies in a faster framework for renewable energy.

“There’s the realization that this isn’t an ‘either/or,’ or a beauty contest between traditional fuel and newer technologies,” he said.

Caught between superpowers

As tensions are still rising between the US and China, the Philippines – and by extension Southeast Asia – finds itself amid geopolitical risks brewing on the horizon. Knight stressed that for the energy transition to develop more, the sector needs to withstand some of the system shocks, all without the significant volatility that it presents. Of course, it also needs to be in line with net-zero mission points, or else it will be for naught.

“Geopolitical risk is among the factors that have the greatest impact on the energy supply chain risks. As we’ve seen from a global supply chain risk survey that we recently conducted here at WTW with energy companies around the world, the energy sector itself is highly reliant on its supply chain to build, install and operate the critical equipment and infrastructure needed to power the world – and indeed the Philippines,” he said.

Citing energy security, affordability, and availability as paramount concepts to business and political agendas, Knight added renewable energy demand and project pipelines are already straining supply chain systems, all even without considering the disruptions stemming from the pandemic.

“In the current state, they’re not adequate to meet some of the long-term climate goals that we seek. To build that resilience, companies have to collaborate with their suppliers, their risk managers, the intermediaries, and insurance providers proactively to assess those risks and make informed decisions,” Knight said.

Alluding to the ongoing developments in Ukraine as the closest parallel, Knight said that the impact from those tensions presented itself in the actions needed by the European governments and their respective policies. He expected something similar for Southeast Asia, noting that the key point around the whole issue is supply chain and the disruptions from these US-China tensions.

“We’re seeing, somewhat, a two-tiered approach there. Whilst there is a short-term return to fossil fuel activity, even in Europe, ultimately, renewable energy will be the solution, but that development has been somewhat slowed by the immediate needs of availability and affordability,” he said.

Decarbonization and the insurers’ role

Throughout all of this, and whichever approach the energy sector tries to tackle in the decarbonization journey, insurance is expected to play a key role. Knight described that role as a supporter in a collaboration that involves not just the energy sector, but also the financiers and lenders who will ultimately open the capital needed for this green venture.

“Our role is effectively to help and support clients through the transition, provide and highlight the risks that are associated, and provide them with mitigation plans. This can be done via different avenues through risk analytics. For example, helping our clients to understand the risk financing requirements and provide the risk engineering to these particular assets as they transition,” he said.

While he assured that the insurance sector will be supporting clients in the transition, Knight asked for an understanding from their collaborators, especially with regards to priorities and decisions which can affect the future.

“Everyone needs to really understand … the transition journey with an acceptance that there might be some short-term difficult decisions to be made. Ultimately, these are the companies that will be financing the transition and we need to supply a line of capital towards them,” he said.

As for WTW’s outlook in the region in terms of the energy sector, and despite the numerous challenges, Knight said that he is excited by the opportunities that energy transition presents.

“The International Energy Agency has cited that the clean energy investments that are needed to meet the energy transition over the next 30 years is around $100 trillion. If we break that down, it’s about $3 trillion per annum and that’s a significant amount of investment. That is part of the reason why we continue to invest in talent in the natural resources sector, so that we understand and partner with our clients more closely in this journey,” Knight said.

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