Articles - Renewable Energy with John Scott


In 2012 UN Secretary-General Ban Ki-moon began leading a global initiative called Sustainable Energy for All aimed at mobilising action in support of three interlinked objectives to be achieved by 2030; providing universal access to modern energy services; doubling the global rate of improvement in energy efficiency and doubling the share of renewable energy in the global energy mix. Providing universal access to modern energy services; doubling the global rate of improvement in energy efficiency and doubling the share of renewable energy in the global energy mix.

 In recent times, we have all become increasingly concerned with climate change and the affect we, as a species, are having on our planet. For the insurance industry the concerns are centred on climate risks to its corporate clients which include regulatory costs, climate policies, liability exposures and natural resources critical to continued operations.

 Interview conducted by Ivan Clarke

 I speak with John Scott, Chief Risk Officer, Global Corporate for Zurich Insurance about renewable energy risks and its development in the insurance sector.

 IC: The 2012 ‘Global Trends in Renewable Energy Investments Report’ found that in 2011 global investment in the renewable energy sector increased 17% to $257 billion – a six fold increase on figures from 2004. What do you think are the key drivers for the strong and sustained growth in the renewable energy sector?

 JS: Unfortunately there is no simple answer to this because it varies across geographical territories. In North America and the UK for example it is free market led whilst in others such as France or Germany energy infrastructure is driven predominantly by government investment, with private enterprise building and developing power sources whether they be fossil, renewable or nuclear. Generally speaking there are different incentives structured around either tax breaks or subsidies that drive the economics of the different renewable energy sources whether it is wind, solar or the less mature technologies of wave and tide. This changes the economic imperative for developing one or the other of those types of technologies. I think broadly the drivers for renewable; and for developing low carbon sources of power have their roots of course in the Kyoto agreement and the generally accepted view by the scientific community that there is some kind of anthropogenic influence on climate change. 

 For some 18 years the Conference of the Parties, COP, the original signatories to Kyoto agreement, have tried to establish a globally binding agreement on greenhouse gas emissions and didn’t succeed which is more a reflection of the complex political issues surrounding this topic and the difficulty in reaching any global agreement on any global issue. There are some places, such as Europe for example, with carbon trading schemes such as the EU Emission Trading Scheme whereby carbon dioxide emissions are given a value to act as an economic incentive for low carbon power generation infrastructure.

 Whilst there are a number of economic drivers, the underlying driver for development of low carbon energy sources, including renewable, is the desire to reduce green house emissions overall and reduce the impact on climate change. If you look at the sources of the carbon dioxide about 50% of total human produced carbon dioxide emitted comes from fossil fuel power generation with a further 20% coming from transport, so in addressing those two industries you can make a significant impact on 70% of the carbon emissions that are contributing to global warming.
 
 IC: What role does the insurance industry play in the renewable energy sector and what opportunities do you feel this sector affords insurers?

 JS: Fundamentally there is nothing different about the renewable industry when compared to any other industry in terms of what insurers can offer. Our basic proposition is to transfer risk off other people’s balance sheet and to spread risk through a portfolio process acting as an enabler for industry to develop technologies or develop industry in a way that is well risk-managed. That is our core insurance offering if you like, but of course we also provide a lot of information about risk and how to manage it. This might be in the area of say project risk management which is well understood by most people that are constructing and developing these projects but also some of the other risks which might be in the area of property protection, protection from natural hazards or liability covers, in other words, first or third party liabilities from operating any type of plant.

 IC: What unique risks do companies face when operating in the alternative energy industry?

 JS: When you think about the renewable energy sector some of the risks of a wind farm would be in its construction and in fact its operation; this might be dependant on whether it is onshore or offshore. For example, with offshore farms which are comprised of very large wind turbines there is the issue of foundation strength which can be mitigated by construction techniques and adequate surveys of what the soil or rock surface beneath the site is like. There are other hazards such as blade failure which is a risk being managed on a relatively novel piece of technology which, in general, insurers and underwriters are not so keen on. Insurance generally works best where you have a very good understanding of the risk in terms of its frequency and likely impact which enable you to price it adequately.

 Another aspect that affects solar as well as wind is that these sources of power only operate when the sun is shining or when the wind is blowing. If you get a cloudy day with no wind then that can be a little tricky because then these solar/wind farms are not producing. On an individual day that may not matter because you can balance out the electricity supply with other sources of energy but this needs to be assessed over the lifetime of a solar/wind farm project, which may be several tens of years. Obviously this goes into the planning and site selection of these farms and how often over that, ten, twenty, thirty or forty year period, when you have days that the wind isn’t blowing. In fact, it is far more narrow than that because you cannot operate these turbines above or below a certain wind speed so it is about that window of optimum wind and how often it is going to be the case that the wind is blowing in that way, and then, even when it is blowing that way is it during a period of low demand? You have to be wise to the commercial reality that, when you produce your electricity from whatever source, you still have to compete with all other sources and of course, the energy operator is only going to use energy from a source that is most cost effective at a particular point in time during the course of a day.

 IC: What is your view on the assertion that weather patterns globally are being directly affected by climate change?

 JS: You have to be a little bit careful about making an assertion that climate change is affecting weather. You often hear various prominent figures say that there is a direct impact on weather from climate change, however you would intuitively expect that as the earth warms gradually that there might be greater precipitation. Whilst there is clear international agreement between the Intergovernmental Panel on Climate Change and scientists that there is human impact on climate change, the next step, which is the scientific linking of climate change to change in weather patterns, generally referred to as attribution, is still not clear. This is an area of intense scientific interest and further work which will influence future investments and policies around mitigation and adaptation to climate change. As I say you would expect intuitively to see more frequent or more intense weather patterns whether that is more intense flooding or drought and certainly in the last ten years one could argue that we have seen a lot of frequent natural catastrophes. In truth it is actually very difficult to tell given that climate is operating over very long periods of time whereas weather is operating on a daily basis - as the quote goes “climate is what you expect, weather is what you get”

 IC: How does wind energy compare to other renewable energies such as biomass, solar, hydroelectric and geothermal in regards to cost, production and risks involved?

 JS: I think this is incredibly variable and driven by the subsidies or tax breaks that governments give to encourage the development of these technologies; this distorts the relative cost of these technology types. There is another clearly understood engineering concept of "the experience curve", as you build up a technology over time you become competent and find new efficiencies in the development of these technologies and the cost of the unit power comes down dramatically through a scale effect. I think with all of these industries biomass, solar wind and to some degree hydro electric and geothermal, even though those have been around for much longer, they are still relatively low volume in comparison to fossil fuels and nuclear, so it will take some time for costs to come down.
 
 IC: Which renewable energy do you see as having the most potential for growth?

 JS: I think the best way to look at this is at a portfolio level. If you want to create a low carbon infrastructure as in for example the UK, with the current electricity market reform bill the government is trying to create a range of power generation technologies. When you think about it you would want some component of all the power generation types to manage the external risks of say not having the wind blowing at the right speed or the sun not shinning at the right time. For example with wind and solar not being very affective currently in dealing with load spikes, you would want some element of fossil fuel power that is mitigated or abated by having some kind of carbon capture and storage associated with that. So having a combination of these low carbon energy technologies is probably the best way of doing it.

 IC: Zurich has released a number of reports focusing on Solar storms. Reports indicate that we are currently in the peak of the 11-year solar storm cycle and last year saw a powerful solar flare in March. What risks do these solar storms pose and why are they classed as a mega-risk?

 JS: This comes under the broader topic of space weather and actually, in addition to the Zurich Insurance reports, there is an excellent report that came out from the Royal Academy of Engineering in the UK entitled Extreme Space Weather: impacts on engineered systems and infrastructure. In addition to my comments, I would encourage you to take at look at that. Solar super storms are rarely occurring events that generate x-rays and solar radio bursts. In recent history, since we have had a significant scale of power plants and communications infrastructure there haven’t been many of these events, occurring perhaps once every century or two. Most solar super storms miss the earth travelling harmlessly into space and some of those that do come towards the earth only partially interact with the Earth’s environment with minor consequences.

 There was a near miss in terms of a big solar storm back in 1989 that actually caused the partial collapse of the Canadian electricity grid and also the Carrington event in 1859 which is the largest solar storm that we have measurements for but of course in 1859 there wasn't anywhere near the sort of scale, sophistication or reliance on technology that we have today so we have to extrapolate on what the likely impact of a major super storm event on current systems might be. The impact could be for example damage to the grid infrastructure and in particular the transformers through geo magnetic disturbances which could result in outages of power that take significant time to repair. In the UK analysis has been done on the grid which actually shows that we are reasonably robust for various technological reasons and the way in which the grid is designed to deal with redundancy with one or more super transformers going down. I would emphasise that these are rare events and whilst we are not entirely clear on the potential impact there is a lot of work being done to understand it with technical people from industry trying to put in place the appropriate mitigations.

 John Scott is Chief Risk Officer for Zurich Global Corporate. He joined Zurich in 2001 as Senior Vice President of Zurich Strategic Risk, becoming Head of Risk Insight in 2007 and took on his current role in 2009. John leads the global, regional and local implementation of the Group’s enterprise risk management strategy across Zurich Global Corporate.

 A PhD scientist with broad industry experience in the energy, oil and gas and chemicals industries, John brings a strong customer perspective to his risk management role within the insurance industry. He leads innovative work within industry consortia, such as Climatewise to address insurable risk issues associated with implementing low-carbon technologies in wind power and CCS, in particular related to long-term storage risks of carbon dioxide.

 John currently chairs the CCSA (Carbon Capture and Storage Association) group on risk and is on the stakeholder dialogue board of the ECO2 – a multi-agency European Commission funded project to investigate the impact on marine ecosystems of sub-seabed CO2 storage. He has also been an advisor to Governments and intergovernmental agencies such as the European Commission DG Energy, the IEA (International Energy Agency), the UK Crown Estate and the UK Department of Energy and Climate Change (DECC). 

 Ivan Clarke is the European Principal for the Actuarial Search practice covering senior Actuarial and Risk appointments across P&C and Life markets at IPS Group. IPS Group founded in 1969 provides professional recruitment services to the insurance industry sectors in a variety of locations globally. For more information visit www.ipsgroup.co.uk and http//uk.linkedin.com/in/ivanclarke

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