Welcome to our Power Market Review for 2021. Since our last Review, thankfully, there seems to be increasing light at the end of a long COVID-19 tunnel. Whilst international travel remains severely limited, we are starting to see encouraging signs of an economic recovery and a fightback to the virus with the record time development and acceleration of vaccination programmes around the world.
We continue to wish all our readers a safe remainder of 2021, and just hope that by 2022 some semblance of normality will have returned to our lives.
In the meantime, the risks emanating from the changing climate continues to accelerate in significance. During the last 12 months there have been several developments which show that the ongoing energy transition is going to have even more profound implications for both the power and the insurance industries than might have been supposed. So this year we have titled our Review “Adapting to new realities” as we think that the changes to the power industry climate risk landscape continue to evolve and grow in significance.
Among the developments in recent months, perhaps the most striking has been the publication in May of this year of a new work by the International Energy Agency (IEA) entitled Net Zero by 2050: A Roadmap for the Global Energy Sector1 which outlined what the IEA considers needs to happen if we are going to get to net zero by that date. Some of the IEA’s conclusions make for startling reading for the power sector, especially their implication that there is little or no future for traditional fossil fuels in the power mix of the future. The IEA’s pathway is of course one perspective and with every pathway there is always a challenge.
It's fair to say that the scenario envisaged by the IEA reflects the position taken by a significant proportion of the global media and public opinion. And of course there is no doubt that very serious changes are on the horizon for the power industry. But is this scenario a truly realistic one? In our view, the energy transition is not a simple matter of an immediate and irreversible switch to renewables - even if that were possible - at the complete expense of the fossil fuel industries. I believe there must be room for these industries to adapt and absorb new technologies to enable them to make an active contribution to the transition, rather than face a wholesale abandonment by their key stakeholders for renewable sources of power such as Wind and Solar.
That’s why this year we have taken the opportunity to present two articles at the beginning of our Review that challenge the IEA scenario, while at the same time fully supporting the aims and ambitions of the Paris Agreement. Firstly Christopher and Katarina de Vere Walker, both of whom have spent their entire careers immersed in the power industry, show us why they think that the fossil fuel industry can’t be ignored as we move down the path towards net zero. Secondly Michelle Manook, CEO of the World Coal Association, makes the case for why the world should not write off the coal industry as it moves towards “clean coal”.
We at Willis Towers Watson continue to support a just energy transition; in doing so, we think that it is only fair to present different sides of this challenging and sensitive subject so that our readers can discern for themselves how the risk landscape in the power industry is likely to evolve during the next two decades.
These articles are followed by two from our own climate specialists, Tony Rooke and Anna Haworth, that show how risk intermediaries can help Risk Managers play a meaningful role in helping companies navigate their way through the challenges posed by the transition – regardless of what form it eventually takes.
The remainder of Part One focuses on how the power industry is adapting to new realities in a number of specific areas. Our US colleagues have an interesting perspective on the development of microgrids as a way of meeting grid and customer needs, as well as discussing some of the lessons learned from the recent Californian wildfire and Texas freeze losses in terms of developing future grid resilience. We also look at the impact that COVID-19 is having on the various civil unrest risk inherent in the global power industry, as well as examining how countries in South East Asia are meeting the challenge of rising power demand.
Part Two focuses on three ways in which risk intermediaries are currently helping the power industry to manage their risk and insurance agendas. I would especially like to draw your attention to CyNat, a new insurance product especially designed for the power industry which we think offers wider and more use friendly cover to the industry than that provided by either the conventional Property or Cyber markets. We also show how on-line risk engineering dashboard portals provide a range of benefits in communicating risk data and insights to the power industry, as well as outlining a recent case study demonstrating the value of using the latest analytical techniques to underpin a revised and enhanced risk management strategy.
In the meantime, conditions in the global Power insurance markets continue to be challenging for almost all insurance buyers, especially from a Liability perspective. In Part Three of the Review we provide comprehensive updates from the International and US markets, as well as a round up from Beijing, Dubai, Miami and Singapore. While we believe that in general terms the actual rate of hardening has now decreased for most lines of business from last year’s percentage rises, the pressure to keep pushing for year-on-year increases shows little sign of abating. And although it’s likely that 2020 may prove to be a profitable one in overall terms for Power insurers, we are aware of two highly significant losses already in 2021 which may impact the 2020 year of account more negatively than previously thought. Buyers will continue to need as much guidance as possible from their risk intermediaries if they are to benefit from the best terms available in what is still a challenging market.
We very much hope you enjoy reading the Review and as ever would welcome any comments or feedback that you may have.
Graham Knight is Head of Global Natural Resources, Willis Towers Watson. graham.knight@willistowerswatson.com
1 https://www.iea.org/reports/net-zero-by-2050
