The renewable energy sector includes many energy sources: wind, solar, hydrogen, hydro, geothermal, wave and others, and each face specific risk exposures throughout different phases of project development and operations. When determining the risk for any asset it's essential to understand and consider the company's exposure across all key areas of legal, financial, regulatory, contractual and physical risks, as well as the social impact it presents.

Businesses which have complete knowledge and understanding of their risk profile are well positioned for achieving best practice corporate governance in decision-making on how risks identified are to be managed, be it through outlaying risk to another party or knowingly retaining the risk on a company's balance sheet.

Often full understanding of a company's risks is best achieved through the risk expertise and advice of a broker and working in collaboration closely and concurrently with both operational and financial teams to consider all perspectives around what the identified risks mean to their business.

The insurance approach to renewable energy project financial risk management

Working through a schedule of identified risks, a specialist broker offers experience and understanding of the energy industry and of the insurance market providers offering capacity to this sector, to provide advice on accessing and transferring risks to an insurer via insurance policy coverages or deciding which may be retained.

Solutions may be through traditional insurance mechanisms, adjustment of existing insurance products to cover specific needs, consideration of alternative risk transfer solutions, or a combination of these. The key for any energy business is having clear understanding of their total cost of risk, which is the risk coverage they are outlaying, plus what is being retained, or 'self-insured', and costs of both.

Another critical factor in renewable energy financial risks is regarding any obligations imposed by the financial institutions involved, such as lender requirements for risk coverage in certain areas, which often has a direct bearing on the insurance the business must have. Gallagher has significant experience in dealing with financial institutions, both in identifying risk, placement and providing the appropriate documentation including letters of reliance to these institutions

Risk considerations through a renewable energy project lifespan

For energy businesses involved with low-carbon energy alternatives the risks are typically assessed through lifespan stages, as the exposures and vulnerabilities involved change considerably during each phase and may be specific to the company, not the energy type or operation itself.

Start-up risks tend to be limited to corporate rather than operational concerns. During this phase it is critical to find the balance between addressing the current risk profile along with the company's future growth aspirations, taking into account their commercial appetite.

As a business progresses towards the development or construction phase the risk profile changes and is often influenced by having many projects requiring finance. Investors have significant influence over the risks being retained or covered with regard to protective guarantees on potential investment losses, both in the form of a loss during construction through delay to project commencement, and/or inability to meet contractual sales obligations.

Post completion of the construction phase, risk protection consideration shifts to ensuring assets are adequately covered, noting both technological enhancements and value differentials between the time of project financial investment decision (FID) and completion. The aim is to protect the business against any loss of output while ensuring all contractual and regulatory obligations are appropriately identified and addressed.

A major factor with any new form of energy is the reliability and consistency of production. This is most critical when it comes to meeting the contractual obligations of energy sales or supply agreements. It is imperative that the insurance broker fully understands sales agreements and imposed responsibilities if production is compromised.

A further risk value consideration is supply chain delays following a loss, which can affect both the physical reinstatement of a loss and the financial impact. This can be a geographical and geopolitical issue where spares and/or parts may be available but the route by which it would normally be transported is no longer viable.

How risks change for traditional energy operators transitioning to renewables

The transition from a traditional exploration and production (E&P) company into renewables presents a significant change in risk profile, often requiring a different selection of insurance coverage and program structure. This generally requires the use of different insurers and/or class underwriters to that of the traditional upstream markets to address those risks associated with the renewable phase.

Gallagher has experience in managing this change in risk process, ensuring the optimum results are independently achieved for each operation while also seeking to maximise any marketing synergies that may exist or can be created. We also ensure there is no duplication in coverage and that each insurance program structure considers the financial impact if either one part of the business (traditional vs renewable) incurs a loss.

It may be in a transitioning business's best interests to reinstate exploration and production phase loss coverage in preference to insurance covering the financial and regulatory obligations involved with closing these facilities.

Regulatory uncertainties further complicate the carbon capture and storage (CCS) insurance landscape, as the legal and regulatory frameworks surrounding them are still developing. As CCS projects vary widely in scale, location and technology, insurers must tailor coverage to address the specific project risks.

Gallagher works closely with the energy insurance market to influence and assist in developing innovative solutions around risks relating to issues such as:

  • damage to property associated with CCS sequestration facilities and infrastructure
  • risks associated with the wells and underground infrastructure
  • liabilities relating the process involved in capturing, transporting and storing emissions
  • loss of revenue derived from selling carbon credits or from the transportation or storage of carbons and other emissions
  • performance guarantee risks if a facilities does not perform as expected (particularly important to retrofitted CCS technology.

The critical factors for renewable energy insurers when offering coverage

Potential insurers of a renewable energy or transitioning energy business need to be informed of project timelines, as well as the contractual obligations around supply of product.

Engineering is also a significant consideration, with technology — new or proven — a critical factor. Proven technology is generally seen by insurers as less risky since its capabilities are known. New technology, which can include the scaling up in size of existing technology, represents a higher risk which may have a direct impact on initial pricing or availability, with higher deductibles imposed and potentially more restrictive cover offered.

The Gallagher Energy team can assist with risk and financial risk management strategies for businesses entering or expanding their presence in the low carbon/renewables sector, through:

  • the ability to identify associated risks
  • a strong understanding of the regulatory regime
  • knowing the markets willing to offer the cover required in the sector.

Our knowledge of the industry, depth of expertise and relationships with energy-specific insurance markets and wholesale brokers, along with understanding risks and how to best represent them provides confidence that our clients have the appropriate cover in place throughout different phases into operation.

As an expert risk partner in the renewable energy market Gallagher provides expertise on the ground through our local market-awarded energy specialist team in Australia, and access to collective international resources.

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Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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