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China: opportunities & challenges for renewable energy

China: opportunities & challenges for renewable energy

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Introduction - overall Chinese Power market conditions
For Chinese Renewable Energy business, premium rates in 2020 are basically flat compared to 2019; as the prevailing domestic economic trend is gradually heading in a downwards direction, it is anticipated that the domestic insurance market is more likely to compete more fiercely for the more limited pool of domestic business this year than in 2019 and keenly support Chinese interests abroad. However, market combined loss ratios for Onshore Wind business are expected to exceed 120%; if 2020 turns out to be a smooth year, the Domestic Power and Renewable Energy insurance market is likely to smooth its book from the continuing activity in traditional coal fired power plants, which has been running in parallel with the growth in domestic renewable energy.

Even with the expected reduction in technology losses through continuous lessons learned, there is no early indication to date of any obvious improvement.

Onshore Wind
On August 31 2019, wind power grid capacity reached 200 GW in China, including 11 GW of new generation capacity during the period from January 1 to August 31 2019. This was only 40 MW lower than during the same period in 2018.For Chinese Onshore Wind, the national average abandonment rate decreased from 12% in 2017 to 9% in 2018. The main reasons were that the bidding “on grid” for onshore wind power and power generation indicator should match their coal fired and renewable energy equivalents. It is believed that average annual newly installed capacity will keep on growing, to add an additional 20 GW during the next four years. The renewable energy initiative remains a key objective for China.However, the total combined loss ratio for Onshore Wind is still over 100% during this period. Even with the expected reduction in technology losses through continuous lessons learned, there is no early indication to date of any obvious improvement. In consideration of the above, but noting that competition among local insurers is particularly fierce, it is anticipated that premium rates for Chinese Onshore Wind will be flat in 2020 compared to 2019.Offshore Wind
For Chinese Offshore Wind, new power grid capacity reached 3.08 GW in 2019; in 2020, this is figure is estimated to reach 4.13 GW, resulting in total Offshore Wind grid capacity of 10.84 GW. Investment in new construction projects reached US$8.8 billion in 2019; this is expected to rise to US$11 billion in 2020, which means that approximately 20 projects are scheduled to begin construction every year. Most of these wind farms are located in the Jiangsu, Fujian and Guangdong provinces, with the largest wind turbine able to generate as much as 7 MW.In 2019, with the exception of losses arising out of Typhoon Lekima, no other major Chinese Offshore Wind losses have been recorded. It is now a more common feature for Marine Warranty Surveyors to regularly be appointed to assist in risk mitigation activities for construction projects; as a Third Party, their involvement is not necessarily mandated by insurers.In terms of rating levels, by the end of 2019 Chinese Offshore Wind construction insurance premium rates were averaging between 0.42% to 0.43% (net to insurers) excluding Delay in Start-Up (DSU). During the course of 2020, these rates may decrease by 5-10%, based on individual risk profiles. As part of the same trend, operational period insurance rates for Chinese Offshore Wind are between 0.15% to 0.17% (net to insurers), excluding Business Interruption (BI). However, during 2020 we anticipate that this premium rate may decrease to less than 0.1%. There remains a strong appetite for non-domestic Offshore Wind projects involving Chinese interests, broadly in a supportive capacity.

Hydro
Turning now to Chinese Hydro, national total installed capacity was 310 GW on August 31 2019, including
280 GW of conventional hydro power. From January 1 to August 31 2019, new hydro power generation capacity was 3.15 GW, which was less than in 2018. No large-scale hydro power projects commenced in China during 2019 and no major losses were recorded. Both buyers and sellers of insurance recorded a profitable year from Hydro business during 2019.Solar
For Chinese Solar, national grid solar power capacity was 140 GW on August 31 2019. New added solar power generation capacity during January 1 to August 31 2019 was 18 GW less than the same period for 2018. On May 31 2018, the Chinese government issued its “Notice of Solar Power Related Matters in 2018” stating that solar farm construction projects would henceforth not benefit from government subsidies. This policy quickly caused a rapid “ebb tide” of reduced investment, reversing China’s solar power construction boom.In 2019, the loss ratio for Chinese Solar has reached more than 150%, which is worse than for Offshore Wind. The main causes of loss have been natural hazard, machinery breakdown (inverter, etc.), and fire. However, because of the short duration of construction works, the premium rate for Construction insurance in 2020 will be at the same level as 2019. But we should be prepared to be surprised - the premium rate for Operational insurance in 2020 may be 10% less than 2019 because most operational solar farms are owned by many state-owned enterprise groups who procure blanket insurance every year.Sources of risk
There are three main sources of risk for the Chinese renewable energy industry:

Equipment manufacture: for example, no enough operational data for verification;

Limited risk control/risk management levels; and

Poor power plant operation and maintenance levels.

Each party – buyers, sellers and brokers - should pay more attention to all these issues, and play their own part in driving improvements, enhancements and reinforcements to the risk mitigation efforts implemented by the industry.

One Belt, One Road – co-operation with global insurance market
For overseas power business with Chinese interests, many state-owned enterprises are including their overseas power assets into a single ‘One Belt, One Road’ strategy. China insurers are providing increasingly significant capacity to support these enterprises, with competitive premium rates backed up by reinsurance; however, Chinese insurers are lacking reinsurance treaty support for DSU/BI and Terrorism. So in most cases where there is a significant BI requirement from the insured, Chinese insurers have to co-operate with the global insurance market. Then the premium rate will revert to reasonable levels.
For overseas power business without Chinese interests, no more than five China local insurers can underwrite these lines of business to comply with Chinese insurers’ internal underwriting regulation policies. Because reinsurance treaty protections cannot be used for this kind of business, Chinese insurers have had to write limited lines governed by their net retentions. However, global insurance market premium rates are attractive compared to Chinese local premium rating levels.
Another reason for adopting a prudent approach is that the Chinse insurance market cannot afford to become impacted by a significant loss record, even for limited participations on known risks where related loss control (risk management) measurements for these programmes are in place.

Johnson Liu is a renewables specialist Beijing, Willis Towers Watson.

¹ All statistics for this article are from https://library.wwindea.org