Power sector faces up to transition risks

Power companies are facing key challenges arising from energy transition and the move to cleaner fossil fuels, according to Willis Towers Watson’s 2021 Power Market Review.

These include how power companies need to substantially reduce their greenhouse gas, emissions as well as ensuring the resilience of their assets and operations to the physical impacts of climate change.

The review outlines some of the unique risks to the sector that must be managed effectively to maintain reliable supply.

George Nassaouati, head of Natural Resources Asia, WTW said: “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.

“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.”

He added: “Overall, the insurance capacity in Asia is shrinking in the Power sector. While the rate of hardening has now decreased for most lines of business from last year’s percentage rises, the pressure to keep pushing for year-on-year increases shows little sign of abating.

”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 programmes.

“It is imperative that buyers and their brokers deliver clarity, transparency, and a renewed engagement with their leading insurers. Only then will they minimise the impact of this challenging market.”

The review also explores how geopolitical power from energy transition will derive from:

• 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, and
• Innovation of new technology, business models and industries and flexibility to the pace of transformation.

From an insurance capacity perspective, WTW estimates that the global theoretical total has now reduced still further to approximately $3.25 billion, with the realistic level in the region of $1.4 billion.

Losses for 2020 are more extensive than 2019 with two major power losses in 2021, totaling $450m between them. However, this is less severe than the period 2015 to 2018.

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