What will become of ageing fossil fuel projects, and insurance, as the world shifts to greener energy sources? Insurance and risk professionals at the coalface share
The signs are there. Investment in Australian renewables leapt 150 per cent last year; the country has committed to a 26 per cent reduction in greenhouse gas emissions by 2030; Allianz recently announced it would exclude all coal risks by 2040.
These signs all point to a significant uptick in the decommissioning of fossil fuel projects in Australia and the region. “We, the insurance industry, need to plan and work with our clients to get our heads around the exposures together,” says Brett Gardiner, Liberty International Underwriting’s Vice President of Energy, Property and Construction for Asia Pacific.
If the country is to meet its 2030 Paris climate agreement commitments, it will need to move to 70 per cent renewables.
Australia’s oldest operational coalfired power station, Liddell, is slated for closure in 2022. It first roared to life when Gough Whitlam was still in opposition and, like up to 75 per cent of Australia’s coal-fired power stations, it’s operating at or beyond its original design life (Department of Industry and Science, Energy White Paper 2015).
In fact, only six of Australia’s 20 largest power stations were built after the Cold War. And global trends indicate many power stations built this century are already closing due to inefficiencies. “That sort of decommissioning activity, while it’s not going to be happening on a weekly basis, it’s going to be happening probably annually from around about five years’ time,” says Gardiner.
RETIREMENT AND RISK
Retiring these projects is not a task to be underestimated. “It could take as long as four years to fully decommission, dismantle and remove the equipment from sites, then decontaminate and remediate them,” Gardiner says. “Just to start with you have a one- to one-and-ahalf-year period de-energising the site and removing transformers, lube oil, pumps and turbines. If these activities are not handled carefully they can have a significant impact on the water table.”
Insurance for decommissioning projects normally spans a range of product lines, including environmental impairment liability, which is particularly important. “Until you actually take facilities apart you might not know the nature of liabilities,” Gardiner says. “There may well have been environmental impact to the land over a long period. Or it can be a sudden and accidental incident during decommissioning,”
Workers compensation and liability are also significant considerations. “You’ve got an ongoing liability, and potentially worker’s compensation issue, given that you’ve got operational staff staying on to do these activities, and specialist contractors coming in to remove asbestos and so forth,” Gardiner says. “Facilities will have a lot of remaining coal dust, rubber conveyors, residual oils – all of that is combustible, so you need to keep the fire protection systems operating.”
Swiss Re Head of Innovative Risk Solutions APAC, Andre Martin, adds that risk associated with rehabilitation is being covered by new products. “We see an opportunity to offer rehabilitation bonds as an alternative to bank guarantees,” says Martin. Other product lines relevant to the decommissioning process include General Liability, Construction, Marine, Project Cargo and, in many cases, Directors & Officers.
While decommissioning risks may be predominantly managed by specialist corporate brokers, there could be wider implications and opportunities for all, says Gardiner. “Projects of this scale don’t come along all the time – they’re the kinds of projects that set precedents,” he says. “So, while you may not necessarily be writing this business, if something in a project of this size and scale goes wrong it will have legal implications.
“Then that will filter down to brokers who are writing smaller accounts that look after one or two lines.” And then there’s opportunities associated with what replaces fossil
SHIFT TO RENEWABLE ENERGY PRODUCTION
Fossil fuels currently account for 87 per cent of Australia’s electricity generation (Department of the Environment and Energy, 2017). If the country is to meet its 2030
Paris climate agreement commitments, it will need to move to 70 per cent renewables, the Australia Institute calculates.
Making a step in that direction, the amount of renewable energy construction underway in Australia almost doubled in the six months to March (Green Energy Markets,
March 2018). And once those projects reach production phase they’ll present plenty of new insurance risks and opportunities.
Senior Risk Analyst at Munich Re Hong Kong, Ronald Sastrawan, says traditional risks will remain the most important consideration for renewables. “The ‘traditional’ risks of physical damage to equipment due to natural hazards must be insured by ‘traditional’ operational insurance policies,” he says.
TECHNOLOGY AND WARRANTY RISK
Technology risks that come with cutting-edge renewables projects cannot be ignored either. “When new technologies enter the market, no long-term track record exists,” Sastrawan explains. “Therefore, investors are at risk of using wrong assumptions regarding long-term cost and performance when planning [renewable] power plants with a life of more than 20 years.”
Renewable technology also gives rise to a significant warranty risk. Solar modules, for example, tend to come with a 25-year performance warranty. “So most financial
models assume that any underperforming module will be exchanged at no cost in the next 25 years,” says Sastrawan.
But what if the manufacturer goes bust? “The long warranty period, combined with today’s competitive market, results in a high probability that solar projects will be left alone with useless warranties,” Sastrawan says.
These technology and warranty risks are also inherent in battery storage, wind and bioenergy technologies.
WEATHER AND PRODUCTION RISK
Renewable energy production faces business interruption (BI) risks, particularly weather, says Martin from Swiss Re. “By the sheer nature of renewable energy projects, they are exposed to the elements,” he says.
“For Asia Pacific in particular, these projects are facing a very different risk landscape in terms of NatCat events, with many hotspot markets sitting on the Ring of Fire or in cyclonic wind paths.”
“Swiss Re Corporate Solutions’ parametric weather solutions are becoming increasingly popular to protect against a range of exposures like cost over-runs, non-damage delay or interruption, or to complement traditional programs in shortage of NatCat capacity.”
Production risk is another BI risk that’s being transferred to the renewables insurance sector, Martin notes. “Renewable energy is by definition a variable energy source and the viability of projects is exposed to this unpredictability,” he says.
“De-risking production through innovative insurance products such as weather derivatives is an opportunity. Another area for index-based solutions is around Wind
Hedges – lack of wind – or Irradiation Hedges – lack of sunshine.”
GET ON THE FRONT FOOT
Brokers may not yet be dealing with the realities of contracting fossil fuel production or expanding renewables, but they will certainly filter down through precedent-setting events. Or as renewable technology, particularly solar, becomes more cost-effective and accessible to the wider business and personal market. It’s therefore
wise for brokers to be staying abreast of the changes, and potentially relaying them to clients, says Liberty’s Gardiner.
“These days, loss of business is exceptionally difficult to replace,” he says. “This is an opportunity for brokers to differentiate themselves by having conversations around emerging risks – and by providing clients with greater understanding and knowledge.”