Power sector risks emerge amid energy transition – WTW report

Power sector risks emerge amid energy transition – WTW report | Insurance Business Canada

Power sector risks emerge amid energy transition – WTW report

As the global economy transitions to cleaner sources of energy, power companies are likely to face new challenges and risks, according to the 2021 Power Market Review by Willis Towers Watson (WTW).

Some of the risks include the need for power companies to reduce their greenhouse gas emissions (also known as climate change mitigation), as well as ensuring the resilience of their assets and operations to the impacts of climate change (or climate change adaptation).

The review examined how the power industry is embracing the need to meet climate change requirements, as well as how climate change is presenting unique risks to the sector that must be managed effectively to maintain reliable supply.

WTW also explored how geopolitical power from energy transition will be affected by the following factors:

  • Control of the “green earth” materials needed in the energy transition;
  • Availability of renewable sources for power production;
  • Ability to produce and export both power and new low carbon industrial fuels such as hydrogen;
  • Innovation of new technology, business models and industries and flexibility to the pace of transformation, as this is likely to be non-linear in form.

In 2021, WTW estimates that the global theoretical capacity has further shrunk to US$3.25 billion, with the realistic level closer to US$1.4 billion. Losses for 2020 were higher than the previous year, with two major power losses in 2021 totaling US$450 million. However, the losses pale in comparison to the “disastrous” period of 2015 to 2018.

The report indicated that rating increases are now averaging between 15-20% for property programs, depending on a variety of factors, including risk profile, premium income volume, spread of risk, loss record and, increasingly, ESG criteria. This represents a slight easing of the hard market but is still far removed from any actual turnaround in rating levels.

“In these uncertain times, adapting to the new realities of the energy transition and the move to cleaner fossil fuels is critical for a sustainable future for the power sector,” said George Nassaouati, head of natural resources Asia, WTW.

“Here in ASEAN, Indonesia, Vietnam, Thailand and Malaysia account for 80% of total coal demand in the region, and it is not a simple matter of an immediate and irreversible switch to renewable energy. The region also faces the challenge of bringing electricity to almost 45 million people who currently have no access to power. It is therefore essential that there remains room for the power sector to adapt and absorb new technologies such as hydrogen and biofuels, rather than face a wholesale abandonment by stakeholders for renewable sources of power such as wind and solar.”

According to Nassaouati, power insurance capacity in Asia is shrinking. While the rate of hardening has slowed, he believes that the pressure to keep pushing for year-on-year increases is likely to continue for the foreseeable future.

“It is important for power companies to work closely with their risk advisors, using risk and analytics tools to help them manage their cost of risk through purchasing the right limits and retention levels for their insurance programs,” he said.