Q&A: Insuring renewable assets at the dawn of clean energy transition

Yoana Cholteeva 3 March 2021 (Last Updated March 2nd, 2021 17:44)

As we accelerate towards the clean energy transition, the various mechanisms that underly that change will only become more important. We spoke with Andrew Slevin, CEO of international asset valuation advisory firm John Foord about how extreme weather changes stand behind recent claims surge for renewable energy assets as we kick off 2021 and how new US President Joe Biden is likely to influence the renewable industry.

Q&A: Insuring renewable assets at the dawn of clean energy transition
Andrew Slevin, CEO of international asset valuation advisory firm John Foord

Insurance premiums on renewable assets have surged as much as fivefold over the past two years. This trend is expected to grow proportionally with renewable growth and be further encouraged by the incoming Biden administration in the US.

The renewable transition is set to be one of the notable trends within the insurance industry’s underwriting of energy sector asset risk in 2021. With extreme weather, including torrential rain, tornadoes, hail, and wildfires, heavily impacting renewable energy projects around the world, it may become steadily more prevalent.

Yoana Cholteeva (YC): Could you tell me a bit more about the trends around insuring energy assets, especially as renewables are quickly taking over the energy industry?

Andrew Slevin (AS): From our point of view there are two key messages.

One is that as a whole in the insurance sector, premiums have increased and are increasing, in part driven by the historic losses incurred by insurance companies. Insurers were taking in less money than they were paying out in claims for a number of years and this has affected different sectors in different ways but, ultimately, the insurance industry as a whole has suffered. After 10 years of premiums declining, that’s now reversed quite sharply.

Secondly, we’ve seen over the years that the cost of renewable energy assets has bucked the trend, and costs have gotten lower. Initially, that was driven by technology changes, for example, the improvement of solar panel materials, but we’re also seeing heightened investment in the sector pushing down costs, which is likely to speed up based on the climate statements coming from Joe Biden and his administration in the US.

We see that whole process of renewable sector investment accelerating in the news and as a result, renewables are becoming cheaper. This should allow owners to mitigate some of the premium increases they are facing because they can insure their facilities for less than the original cost, driven by those improvements in supply chains and the corresponding reduction in replacement costs.

YC: What are the emerging challenges to insuring energy assets?

AS: We’ve seen a significant increase in extreme weather impacting renewables. I think that’s partly added to some of the premium increases we’ve seen in that sector because insurers perhaps weren’t fully aware of the impact of climate events on these relatively new technologies or on the locations of some of those technologies.

One example, there was a very large claim in Texas, due to hail damage on solar panels where the solar panels themselves were cracked or broken by the extreme hail event.

This is something that I think we’re going to see increasingly over the next decade, as the presence of renewable technologies expands into areas where extreme weather is becoming much more of an issue, or where insurers have limited knowledge to assess the risks.

So, I think there’s going to be a balance between permits and location of these facilities from an economic perspective, but equally from a risk management perspective. They are going to have to be managed in a way that ensures owners don’t end up having to make significant claims.

YC: Are there any particular strategies that could help navigate the asset insurance sector when operating with constantly evolving renewable assets?

AS: Firstly, I think one of the things we’re going to see is that it’s increasingly beneficial for asset owners to understand current replacement costs to make sure they’re insuring at the right levels.

But I think, there’s also the fact that the technology itself is going to have to evolve to become more resilient. And that’s something that’s likely to become more important as facilities are located in more marginal areas. For example, if solar panels can tilt up vertically during storms, they may not be affected as badly by hail damage.

So, I think there’s going to be use of strategic design in terms of technology and asset placement, combined with asset and risk management.

YC: How is Biden’s administration in the US projected to influence the asset insurance sector?

AS: I think what the administration’s policies will do in practice is create the opportunity for production to expand for manufacturers of renewables technologies and for expansion of funding and science in that direction. This will continue to push the unit cost per kilowatt of these technologies downwards.

With wind, we’re seeing that turbines themselves are getting bigger and bigger, and as a result the unit cost is going down.

I believe that we’re going to see a lot more of these developments since the Biden administration’s focus on renewables should encourage more and more technology development as well as capital deployment to this sector.

YC: How is the involvement of big data, AI, and cloud analytics technologies poised to influence the insurance sphere in 2021?

AS: As we’ve seen more extreme weather events impacting renewables, insurers are looking at implementing more sophistication around natural catastrophe (Nat Cat) modelling. Insurers are deploying the latest technologies and access to consolidated data to be able to provide better impact assessments on assets.

We recently announced plans for a new product that will launch in the middle of this year, which is a cloud-based reinstatement cost data platform. Rather than coming up with the replacement cost of a facility by documenting and adding up the cost of all the various components, this new technology enables us to say: “Okay, it’s 200 MW solar power plant and it’s in this location and it’s got these characteristics, therefore based on analysis of thousands of other facilities, its replacement cost should be in this range”.

We’re using those technologies to try and come up with the right answers for clients and give them insights that were never available before, partly driven by much, much cheaper access to more powerful technologies and computing power.

Data is also more freely available, with the ability to easier integrate disparate data; it’s so much better today than it ever was. This applies right across the insurance industry.

Insurers are also using access to big data to look at how they can improve the insurance sector as a whole and particularly the products they are offering to the renewables sector.

YC: Are there any other new trends on the horizon?

AS: The recent auction of offshore wind licences in the UK has been fascinating to watch, with BP and Total having secured licences. I think that really demonstrates the commitment of big oil firms to move into the renewables sector and I think that trend will continue, there’s no question.

We also see pressure on owners, given the increase in operating costs and the impact of Covid-19, where everyone’s watching costs and trying to manage risk better. The increase in premiums is hurting businesses across the world, not just in the renewable sector. The ability of companies to reduce the impact of higher premiums by managing risk is going to be vital. From our perspective, we are making sure facilities are insured at the right levels and that they have a holistic view of how to manage costs.