Investment in renewable energies is increasing at a rapid rate and the opportunities are plenty, however, as Ignacio Almazán explains insurers must evolve with this sector to ensure continued cover.
It is no secret that the renewable energy industry has come a long way over the past 30 years. Numbers wise, worldwide energy demand is expected to increase by 50% over the next 20 years. At the same time, investment in renewable energies is increasing by 30% every year and is expected to surpass €300bn in 2010. Energy costs have always been vital for companies, but ever increasing environmental concerns have soared in recent times. Putting these facts together, it is clear that renewable energies have outstanding potential and they will need adequate insurance cover if their future development is to be viable.
Looking at these facts alongside each other is hardly reinventing the wheel, but in Spain the combination of these factors has definitely changed more than just the country's landscape and economy. According to figures released by the Spanish Ministry of Industry, Tourism and Commerce, renewable energies accounted for 12.2% of total gross energy consumption last year and were the only energy sources for which demand grew in 2009, especially in the wind and solar power segments.
Wind power has shown a marked increase in market share in recent years, thanks to the growth of offshore wind farms. The 1960's fuel crisis and the growing concerns over the environmental impact of traditional energy sources had a lot to do with the boom in wind power.
Developments in technology and the search for new markets have motivated manufacturers and project developers to spread their activities internationally, which has brought in new market leaders in the wind power field over the last decade.
And something similar has happened in solar power: the technology has evolved from small facilities with photovoltaic panels to new solar thermal power plants with installed power of 50 MW.
Although solar power's still a long way behind other energy sources in terms of presence, there has been a significant growth in the use of solar power globally as a consequence of favourable regulations and access to new private capital. This growth has also driven the development of other industry sectors also involved in the exploitation of sustainable energies, such as the construction sector.
Because of its geographical situation and climate conditions, Spain is an ideal country for solar energy production, specifically solar thermal energy. Spain, Greece and Portugal are the three European countries that get the most sunlight.
Looking further afield, nearly one third of global investments in renewable energy projects are happening in developing countries. This share could grow at a faster pace if insurance solutions for renewable energy projects were made extensively available to developing countries in the same way as they have been made available in industrialised ones.
Risk management and risk transfer are key components in the successful development of renewable energy projects. The power industry is fast-moving, with new technology constantly being introduced and, by nature, has complex risk with high loss potential, so a deep understanding by specialists is required. And without adequate insurance cover, the planning, construction and operation of mid- to large-scale renewable energy projects would not be viable.
Another challenge in this sector is the fact that some forms of renewable energy are highly dependent on weather conditions. For example, weak winds can cause a serious drop in output - and, therefore an intermittent supply of electricity - from wind farms. If the use of renewable energy increases, this could lead to difficulties in matching supply and demand. Development of new energy storage facilities would help to mitigate these difficulties.
Renewable energy insurance can be designed to cover a range of risks for renewable energy technologies - from wind turbines to hydropower plants. It helps to protect the financial interests of everyone involved in the renewable energy industry, including investors, manufacturers, project developers and utilities. Risks in this industry can come in a variety of forms - from fire, storm or theft, right through to project delays and machinery failure.
Although it's not common knowledge in the public arena, the role played by the insurance industry in the renewable energies field is critical. Not only because the contribution during the operation phase helps bring profit forecasts closer what the project will actually generate, but also because each participant in the process is allowed to absorb and correct these discrepancies, which are brought about by the constant, premature appearance of new technologies in an ever expanding market.
The knowledge and capacity for the market to adapt to the needs of renewable energy clients has also evolved with time and it is fair to say that the know-how and experience gained in other, more mature sectors has helped a lot. Having been present from the beginning to support the development of new technologies as well as being at the side of developers in projects worldwide, the insurance industry has gained a truly global vision.
It is this global vision that allows insurers to give detailed advice and ensure the protection of investments and projects against the impact of potential risks that the industry has seen over the past few decades, for example the risk of overloading the grid; the calculation of the main components' real life-span; the analysis of failures and multi-technological errors as well as the learning that can be taken from local operating needs.
It is this learning that allows the development of new tailored and sophisticated products including transport, assembly, property damage, loss of earnings, loss of production, for example, that are increasingly fundamental to the progression of this sector.
However, there are still challenges. In particular, the offshore sector will have a key role to play in the future. While the offshore sector brings with it a lot of opportunity, it also brings a certain degree of uncertainty. Insurance companies have been preparing for these changes. Using the experience obtained over the last few decades -in the onshore sector, for example- and the different technologies that have arisen, the best possible development and profitability of these new forthcoming projects has been guaranteed.
In conclusion, it is clear to that the insurance industry needs to evolve hand in hand with an ever-growing energy industry -where the impact of renewable resources is increasing rapidly- by supporting the technology developments needed to successfully achieve the global milestones to be reached by the end of 2020.
Ignacio Almazán is RSA Spain's country manager
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