The risky transition to renewable energy

The transition from fossil fuels to renewable energy – a key part of action on climate change – is now firmly in motion.

The transition is on a scale not previously seen in the global economy, with broker Howden’s The Bigger Picture report from June 2024 noting that £15bn ($19tn) had already been committed to renewables projects across the globe through to 2030.

But the transition brings a range of risks with it – some long-established, others still emerging. It is vital that insurers, businesses, organisations and governments identify the risks associated with the materials, infrastructure, supply and operations required for the rapid growth in renewable energy projects.

Without insurance, businesses will be unable to reach their net zero transition goals, nor will they be able to become resilient in the face of the changing climate. However, many environmental technologies are still in the developmental stages and will not be at full maturity for some time.

In addition, the risks associated with renewable energy projects straddle a range of areas, including supply chains, product liability, trade credit, regulation, marine and finance.

Michael Gregory, director of underwriting Strategy at RSA, explained: “A lot of the materials that we need for the transition, whether it is for batteries, turbines or solar panels, come from all over the world.

“A lot of those supply chains are vulnerable, which means that the cost of transition is never as simple as getting gas from point a to point b. Often, it means getting materials from many different parts of the world, bringing them somewhere, creating something and then shipping it somewhere else.

“Economic risk like this requires large-scale investment. Energy projects can be inherently risky, given they are long term in nature, so will they develop a return for investors?

“There is also the potential for policy changes, whether that be subsidies, support for investors or support for projects. Given that there is a real economic risk and it is a long-tail payback, if there isn’t a subsidy or protection for investor’s cash, they may ask whether it is the best way to spend a pound.”

Limitless energy?

Wind and solar energy can be harnessed through specific equipment and infrastructure that must be created using raw materials. Aluminium, copper and steel are necessary for most renewable infrastructure, with other rare earth materials essential for solar photovoltaic panels and for wind turbines.

Similarly, with battery energy storage systems, lithium-ion battery technology is increasingly being used as a way to manage power produced by renewable energy sources, with demand exceeding current supply levels.

Toby Vallance, partner and renewables lead at DAC Beachcroft, said: “Although the sources of renewable energy, such as wind and solar, are in effect limitless, the materials needed to harness them are not.

“Insurers and businesses involved in the renewables supply chain, from the mining and extraction of rare earth materials through to the disposal of disconnected materials, need to be mindful of their risk and possible corporate obligations.”

Renewable energy infrastructure requires regular maintenance and for older wind turbines or materials in remote areas, the costs will be higher. For projects built earlier, some equipment will be reaching end-of-life. However, the recycling of components, especially for complex systems such as wind turbines, is technically challenging and can be expensive. Not all materials can be recycled economically, leading to additional disposal costs.

Gregory added: “There are projects that are trying to be more sustainable, but engage the insurance market too late. Therefore, it is really hard for them to get capacity.

“It is the same as other new technologies and innovations – the importance of early engagement with carriers and risk teams means we can get more comfortable with risks earlier and provide solutions so they can hopefully receive that insurance coverage.

“Sometimes, we’re brought in too late, it is not solvable and you have to go back to square one.”

Climate catastrophe

Early engagement is also needed for protecting the finance required for the green transition. 

Howden’s The Bigger Picture report noted that that insurance premiums for climate resilience and natural catastrophe protection were set to increase by 50% by 2030, reaching as much as £200bn ($250bn) as a result of increased annual losses caused by climate events, accelerated growth in exposures, climate risk disclosures and governments transferring risk to private markets.

Now the trillions needed for the renewable energy transition will require additional insurance coverage, presenting major challenges for the industry.

These stresses will place unprecedented structural pressure on insurance systems across public, private and mutual markets and there is no guarantee that the market will meet this demand.

Rowan Douglas, chief executive for climate risk and resilience, explained: “Insurance is the financial bedrock needed to derisk investments and attract the additional capital necessary to mobilise the climate transition. Astute companies are now elevating future insurability to boardroom level discussions because it will be essential to maintain access to capital. 

“The key is developing long-term partnerships with insurers to build shared expertise and trust and optimise future access to scarce underwriting capacity. The alternative is an invitation to climate valuation risk.”

The transition to renewable energy is fundamental to mitigating climate change. As such, it represents a seismic shift in the risk landscape. The early involvement of insurance companies is essential for the development and financing of technologies that facilitate the energy transition.

Gregory concluded: “We need so much innovation in this space, whether that is around finance or whether it is around products. To enable the transition in different parts of the business, we need as much innovation as we can get. There is good coverage, but there’s definitely more that could be done across the industry.”