What are the key challenges for the power sector?

Global broker urges caution as "Trilemma of Tension" remains persistent

What are the key challenges for the power sector?

Construction & Engineering

By Kenneth Araullo

WTW has released its 2023 Power Market Review, emphasising the persistent “Trilemma of Tension” within the global power sector.

The report urges risk managers to employ horizon-scanning to evaluate their specific risk profiles and collaborate with partners to boost awareness and shape effective risk mitigation, management, and transfer strategies.

The review outlines a sector grappling with the trilemma of balancing energy security, affordability, and sustainability. This balance is being tested by a series of global crises, such as the rising cost of living, supply chain disruptions, and geopolitical tensions. The power sector, faced with the potential for recession and persistent inflation, is navigating risks on several fronts.

Four key challenges for the power sector

The Russia-Ukraine conflict has impacted the European power mix, necessitating a reduction in reliance on Russian gas. With insufficient infrastructure to support imports from alternative sources, Europe faces heightened gas prices and consequent increases in generation costs and wholesale market rates.

Additionally, there's a resurgence of coal-powered generation to compensate for the reduced gas-fired capacity, triggering concerns among insurers due to market volatility and the complexities in assessing exposures.

Global inflationary pressures are elevating energy, commodity, and production costs. This surge, along with a heightened demand for new power generation and transmission infrastructure and lingering supply chain limitations post-COVID-19, is pushing up construction and operational expenses worldwide. Insurers are particularly apprehensive about the sufficiency of insured values, rising claims costs, and the necessity to adjust insurance rates and retentions accordingly.

The shift towards clean energy, through the development of technologies like battery storage, carbon capture, utilisation, and storage (CCUS), and green hydrogen production, is at the core of the energy transition. The pace at which different technologies are adopted remains uncertain. Insurance providers find themselves in a challenging position to support this transition without robust historical data to underwrite confidently.

Climate change presents multifaceted challenges. While the human toll of natural disasters is of the utmost concern, the power sector is also facing a plethora of challenges due to extreme and erratic weather conditions. This includes disruptions to the fuel supply chain, diminished water levels affecting hydroelectric plants and cooling processes, reduced wind for turbines, damage to solar installations from storms, and decreased efficiency in gas-fired plants due to high temperatures, all contributing to market volatility.

“The challenges we reported in 2022 – the Russia-Ukraine conflict, global inflation, energy transition, and climate change – are ever-present,” said Graham Knight, head of global natural resources at WTW. “We’ve seen some positive developments, though. Wholesale gas markets have eased, and supply has shifted away from Russia. There’re signs of global inflation easing as economies respond to higher interest rates, and growing momentum behind the energy transition.”

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