With the symptoms of climate change becoming increasingly apparent, the demand for the delivery of a variety of renewable energy solutions has accelerated in recent years. The development of each emerging green technology — as well as already-established ones — faces its own hurdles for expansion and carries unique implications on the insurance market.
The Paris Agreement
In December of 2015 in Paris, France, a historic legally-binding treaty, The Paris Agreement, was struck by 196 different parties at the UN Climate Change Conference (COP21): to pursue a common goal of holding the increase in global average temperatures to well below 2 degrees C above pre-industrial levels — a temperature threshold that risks unleashing far more severe climate change impacts — and to actively pursue efforts to limit the temperature increase to 1.5 degrees C above pre-industrial levels. Reaching the agreement’s goal would be a monumental feat. To succeed at limiting global warming to the necessary temperature, greenhouse gas emissions must peak before next year, at the latest — and decline by 43% by 2030.
What if we, collectively, fail? That possibility is a grim one. Once global temperatures rise to that threshold and beyond, a range of cascading effects would reach every corner of the globe. Significantly more regions will suffer hot days and heat waves, with about 14% of people worldwide being exposed to periods of severe heat at least once every five years. Droughts and floods would increase in frequency and severity, making farming more difficult, lowering crop yields and causing food shortages.
The seas would continue to rise until entire coastal regions and small island nations — homes to tens of millions of people — will be submerged underwater. This reality could be only decades away. Heat would cause the ocean to become more acidic; and in the process, wipe out up to 90% of the ocean’s coral reefs. Arctic ice thawing would hasten, resulting in 40% of the Arctic’s permafrost thawed by century’s end. And, at such elevated temperatures, about every 100 years the Arctic would regularly experience a summer with no sea ice — a phenomenon not seen in at least 2,000 years. The world’s fisheries will suffer greatly and become far less productive. Entire species will perish. Insects, plants and vertebrates risk extinction.
Established and emerging renewable energy solutions
For such dire prospects, solutions must be robust. But there is no silver bullet. Governments around the globe are looking to utilize a combination of established and emerging renewable technologies, while phasing out pollutant-releasing fossil fuels, such as coal, petroleum, natural gas, oil shales, bitumen’s, tar sand and heavy oil.
Here are just a few of the notable established and emerging renewable energy solutions, and their respective advantages and disadvantages.
- Wind energy (established) —
- Pros: Wind is a high-efficiency energy type with a small carbon footprint; installation is relatively quick. Wind requires low maintenance and operating costs. It is already an established industry, which allows for improved designs and an established skilled and experienced workforce.
- Cons: It’s an intermittent energy source; wind needs to blow for energy to be created, and high winds could result in shutdown. It poses a visual impact on environment as well as threats to wildlife. Wind emits noise pollution. Onshore wind farms are faced with planning permission restrictions; in the UK, backing from local communities is required. Wind energy must be produced in remote areas to permit appropriate construction and maintenance needs. Turbine parts and blades need to be recycled after use.
- Solar energy (established) —
- Pros: Solar energy creates no air pollution or greenhouse gases, operates silently and uses a small carbon footprint. It is a reliable and scalable technology that’s relatively easy and inexpensive to install, and requires low maintenance and operating costs. Solar panels are increasingly affordable.
- Cons: Sunlight hours vary depending on location — storage or alternative back-up power source is required. It results in a visual impact on the environment and loss of habitat for wildlife. Large spaces in remote locations are required for construction and maintenance. It can be manufactured with rare minerals such as selenium, which are not sustainable.
- Hydroelectric (established) —
- Pros: A renewable, managed source of energy that produces minimal environmental pollution while in operation and can generate energy on demand.
- Cons: It impacts the environment by displacing people, affects wildlife habitats and presents a visual impact. Hydroelectric is expensive to construct and operate and not always safe. Energy production is subject to drought potential and extreme weather conditions.
- Geothermal (emerging) —
- Pros: Geothermal is a source of renewable energy that is reliable, stable and has huge potential: the number of exploitable resources will increase with ongoing research and development. No fuel is required — only water.
- Cons: Gases are released into the atmosphere during excavation and the process poses a risk of triggering earthquakes. Plants need to be built in places where the energy is accessible and high construction and operational costs are required. Energy fluid needs to be pumped back into the underground reservoirs faster than it is depleted; management is required to maintain it sustainably.
- Carbon capture (emerging) —
- Pros: Carbon capture can reduce emissions at the source and remove other pollutants simultaneously. It also reduces the social cost of carbon.
- Cons: It is costly and requires additional expenses to be utilized as an energy source. Transportation of carbon can be expensive and hazardous, and the long-term impacts of carbon storage are unknown.
Challenges and considerations for the insurance market
Established and emerging renewable technologies have different sets of risks. Established technologies, such as solar and wind, have been around long enough for the risks to have been identified both on the construction and operational sides. However, with time also comes the aging of technological assets which may, at some point, extend beyond its designed life. It may not be known how much existing/aging assets can withstand, and as technological advancements continue, parts will become obsolete.
Economic and geopolitical conditions also present impacts that weren’t seen before: an unparalleled increase in material costs, consequences of global supply chain pressure (like extended delivery times) due to the Ukraine war, Brexit and the COVID-19 pandemic, and increasingly severe weather patterns due to climate change — all of which can impact claim costs and result in business interruption/loss of revenue claims. Ambitious global plans to construct more renewable technology will exert further pressure on labor and supply chains, which may result in more risk and a higher volume of claims. And, as the advancement of known technologies push boundaries, additional unknown risks lie ahead — leaving insurers skeptical.
Emerging technologies have an entirely different set of challenges to contend with. Being newer in nature, limited technical knowledge and risk data exists, making the risks difficult for insurers to assess and quantify. Only theoretical performance can truly be considered; the technologies are unproven in operation and therefore lack reliability. Additionally, there are no assurances as to whether an energy type will be safe or unsafe as the worst-case scenarios have not yet played out or may not have been considered for specific locations. Insurers are likely less to be aware of equipment and replacement philosophies and the associated costs and risks, and may not yet have established quality control measures, approved suppliers or supply chain assessments.
On the claims side, emerging technologies pose challenges with the lack of suitably experienced loss adjusters and experts available for appointment. Newer technologies inherently lack a base of professionals with sufficient industry experience, specialist training and education, and local market/industry knowledge. Emerging types are also more likely to require engaging multi-discipline/multi-national supporting organizations that not only have adjusters, but also forensic engineers, forensic accountants and environmental consultants at the ready.
The bigger picture
If every insurer takes the approach of neglecting to cover renewable risks in this stage, clean energy development will be stunted. One solution might be for large, market-leading insurers with well-performing portfolios to be willing to accept higher risks, that wouldn’t disproportionately sink profits if its performance fluctuates. Once emerging renewables permeate the mainstream insurance market as established types have, and governments provide adequate guidance, we have a much better shot at mitigating harmful impacts on the environment.