As each year passes, it becomes more and more apparent that the world must switch to more sustainable forms of energy to reduce carbon emissions that contribute to climate change.
However, making the shift is not easy, with renewable power generation accompanied by a myriad of risks that may hamper the current wave of investments.
Corporate Risk and Insurance spoke with Richard Zhang (pictured), head of alternative risk transfer solutions in Asia at Willis Towers Watson – on how to manage the risks surrounding sustainable energy projects, especially in emerging markets.
The risks faced by sustainable energy projects can be sorted into three main categories: (1) protecting the assets, (2) protecting the projects from climate changing trends, as well as (3) protecting the volatility of the energy sources, such as wind, solar, and hydro.
According to Zhang, traditional insurance is not enough to protect against losses that might be incurred due to fluctuating weather, since it only covers material damage, or the first category. Renewable energy highly depends on the weather, which can be volatile and result in huge variations in energy yield. The second and third categories deal with long-term and short-term variations affecting energy production.
“These are the preconditions of the traditional property insurance program,” he said. “The type of production warranty or revenue warranty, which is affected by the weather, is very important in terms of the project for financing. So we’d develop, together with the global insurance industry, products which hedge against the weather risk to support the financing of renewable energy developments.”
These products are broadly known as alternative risk transfer (ART) solutions, which leverage products and sources of funding from outside the traditional insurance market to cover exposures and risks that are outside the scope of conventional insurers. For renewable energy projects, parametric insurance is being adopted by the industry.
“For example, the investment of wind energy today, on average, is one megawatt equals a US$2 million investment in Asia,” Zhang said. “So, a hundred megawatts of wind farms are worth around US$200 million in investments. However, there’s a recently discovered trend that after two or three years of a wind energy project in a certain location, wind speed is reduced, which means the wind resource is diminishing, and that the investment could fail. This is becoming a huge investment risk on renewable energy, especially wind.”
This phenomenon, according to Zhang, has been observed in certain parts of China, the US, and Europe, making investors wary in financing these types of projects due to the long-term implications.
“We are working together with global reinsurance leaders to develop a long-term low wind speed, insurance product,” Zhang said. “For example, if in 10 years, the wind speed has dropped by a certain percentage and the wind energy output is lower than a certain amount, the insurance company is going to pay the difference. This is very straightforward and it significantly improves the bankability of the project.”
Meanwhile for the short term, Zhang revealed that Willis Towers Watson is also working on an insurance solution.
“In the short term, the wind and wind power production are significantly affected by the weather. In wind farm engineering, there are what we call large wind years and small wind years. If the wind speed is low, it means the production may be only a percentage of the expected, resulting in a significantly reduced financial performance. So, to smooth out each year’s financial performance, we have short-term wind energy output warranty insurance. We also have the same thing for solar and hydro.”