The energy industry is changing. A U.S. Energy Information Administration report found that solar and wind accounted for most new electricity capacity. With diminishing costs and increased demand, the solar and wind sectors are the future of energy. In the US, investment in renewable energy is expected to hit $1 trillion by 2023, up from $40 billion a mere five years ago. Globally, financing is expected to hit $7 trillion by 2023.
Swiss Re Corporate Solutions forecasts that renewables will make energy insurance the next multi-billion-dollar insurtech category. The transition toward renewables poses a unprecedented opportunity for fintech and especially for insurtech. A key challenge, however, remains the specialized risks unique to renewable energy.
The renewable energy industry operates at the intersection of multiple risks. It combines traditional construction-related risks at the origin of the asset, counterparty risk during the asset lifetime, risks related to the weather and decay in long-term asset performance. Lack of understanding of risks lead to mispricing assets by assuming higher uncertainties in performance.
Battery Energy Storage Systems (BESS)
With increased efforts to decarbonize the global economy, large-battery storage facilities are mushrooming at unprecedented speed. Along with powering electric vehicles, battery technology is creating grid efficiencies and helping arbitrage electricity prices. With improved technology and falling costs (at 20% of 2010 costs), battery storage is witnessing accelerated growth. In the next 2-3 decades, companies will have invested more than $550 billion in home, industrial and grid-scale battery storage.
In the backdrop of BESS market growth, the planning and development time-gap between concept, construction and operation is reducing. Consequently, those in battery storage are hard pressed to secure customized and timely insurance. Insurance is required to protect revenue streams of BESS projects and makes lender financing feasible. With certain extant battery technologies, performance deteriorates over time, a pet peeve for lenders expecting payback over a number of years. Carriers are offering performance guarantee insurance to protect revenues in such cases, making conducive financing at bankable terms by lenders.
A deterrent to uptake of insurance is the paucity of data available to guide risk assessments, due to limited experience. To address this barrier to growth, incumbents and insurtechs are coming together.
Data-Driven Risk Assessment
To assess risk, insurers use two layers: firstly, the reference data of the batteries is tapped to understand battery chemistry and electrical architecture. The second layer evaluates operational data from the site to gauge how the asset has been designed, built and managed. Leveraging available data has led to AI and advanced science replacing historical reference points.
Insurtech Innovators
MS Amlin Underwriting Ltd, the Lloyd’s re/insurer, is partnering with insurtech Altelium to offer a construction all-risk and operational all-risk insurance solution for BESS. Altelium is a specialist insurtech that provides insurance for batteries, driven by real-time AI-powered data analytics. It works with UK Universities that specialize in different areas of lithium-ion chemistry.
Insurer Munich Re has launched a long-term insurance plan for battery performance, signing up battery maker ESS Inc as its first customer. Aimed at major projects such as stationary storage systems deployed for grid stability or peak demand reduction applications, manufacturers can give customers performance guarantees by backing their warranties for 10 years. Cover can be extended to individual projects, meaning customers are covered even in the event of manufacturer insolvencies.
Insuring BESS projects is a growth area for insurers in the renewables space, providing risk transfer mechanisms for protecting assets and liabilities from transit, construction, operation and performance. Battery storage facilities are exposed to a number of physical hazards, such as fire, explosion and flood, as well as emerging risks like cyber. Building expertise in this growing sector, its emerging technologies and lessons learned from past losses will enable sustainable insurance growth.
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