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Posted: Jul 25, 2013
Profiling the risks in solar and wind: a case for new risk management approaches
(Nanowerk News) The purpose of this new White Paper ("Profiling the risks in solar and wind: a case for new risk management approaches ") by Bloomberg New Energy Finance, sponsored by Swiss Re, is to assess the underlying trends in the renewable energy sector and consider how new risk management and insurance products can contribute to the sector’s growth and long-term sustainability.
As the renewable energy sector continues to grow, so will its demand for insurance and risk transfer solutions. By 2020, an anticipated 50% increase in investment in renewables is likely to produce more than a doubling of spending on risk management services in the sector. Depending on the scenario, expenditure on third party risk management services – including conventional insurance, derivatives and structured products – could reach anywhere between $1.5bn and $2.8bn by 2020 in six of the world’s leading renewable energy markets.
There are three key reasons for this trend. First, the sheer growth in investment needs for renewable energy projects will require new sources of capital, including institutional investors such as pension funds and insurers. These investors require long-term, stable yields, and their risk appetite differs from utilities and private equity investors. Institutional investors commonly allocate only 5% of their assets for so-called alternative investments, a class encompassing renewable energy projects, while typically reserving about 40% for bonds. To attract capital from institutional investors on a greater scale, it therefore becomes important to bring the risk/return profile of renewable energy investments closer to bond-type investments. This can be achieved by de-risking the cash flow volatility of renewable energy assets.
Second, the rising market share of offshore wind, particularly in Europe, will increase construction risk. Delays and downtimes in offshore wind projects – for example resulting from high waves interrupting offshore construction – are not uncommon and can materially reduce the expected returns on investment. Currently, these risks are mostly taken into account as part of negotiated contracts amongst investors, developers, construction companies and manufacturers. Yet they are often neither explicitly assessed nor are their financial costs sufficiently managed. Better evaluation and insurance against these risks would improve project returns.
The third driver of demand for risk transfer solutions comes from everyone who has been impacted by the increasing presence of renewable power generation in the energy market. Renewables will increasingly have a disruptive effect on power markets, as they bring a variability risk which calls for new means of mitigation. Traders and grid operators face low and sometimes even negative power prices, as well as high production volatility and grid balancing issues. In markets with fixed feed-in tariffs, the burden of low power prices and the need to provide back-up capacity fall on incumbent power generators, which negatively affects their profitability. Here too, more sophisticated approaches to managing these risks can reduce the costs of dealing with intermittent output in areas of high renewable energy deployment.