Geopolitics of energy: navigating threats to the renewable industry
Geopolitics of energy: navigating threats to the renewable industry
Introduction: new geopolitical challenges and risks The lenses through which geopolitical risk can be viewed apply to almost every area, and the renewable energy industry is no exception. But how do these risks manifest themselves and how can they be mitigated?
At every stage of the lifecycle of a typical renewable energy project, new challenges and risks are emerging that, if not managed correctly, can threaten the very viability and long-term profitability of the project concerned. Geopolitical risks have always been with us, yet industry dynamics and global trends have caused their importance to rocket up board agendas over the last year.
Understanding geopolitics The outbreaks of mass unrest in Chile, France and Hong Kong have made it clear that political risk events can arise suddenly in regions traditionally seen as risk-free. 61% of respondents of the Association of Insurance and Risk Managers in Industry and Commerce Limited (Airmic) member survey expected geopolitical risk to become “harder to manage” in the next three years – 14% higher than the next biggest risk: climate and environmental disruption1 . This is causing uncertainty for investors, and 40% of respondents in the 2019 Willis Towers Watson Political Risk Survey felt that they were facing more pressure from investors regarding political risk management2 .
For the renewable energy sector, exploring geopolitical risks is important not only because the industry experiences the global ripples of geopolitics, but also because the sector is making waves of its own.
The promise of energy security and independence is changing the power structures of regions and states and enabling downstream sectors such as electric vehicles and heat pumps, which in turn are transforming the future of transport and infrastructure.
2019 saw the first dedicated report from the Assembly of the International Renewable Energy Agency (IRENA) on the Geopolitics of the Energy Transformation as the sector looks to build understanding, and publications such as this Review can help get a sense of the trends experienced across the industry3 .
Dialling in on risk In the last Willis Towers Watson Renewable Energy Market Review4 , we introduced you to the six lenses used to explore these nuances and build an integrated view of risk. In an increasingly connected world, many of the geopolitical drivers of risk are interrelated, and effects often cascade beyond local geographies or individual industry sectors.
Think of these lenses as focusing dials on a microscope. There isn’t one answer to viewing geopolitical risk under the lens – every company’s exposure is different, and the real value is in uncovering different perspectives to ask useful questions. Do you want to zoom out for the global macro view, or zoom in to a local issue? If you don’t have the expertise in-house to understand them, who do we need to talk to?
The lenses cover a broad range of risks – from cyber-attacks to the impact of sanctions – and recognises the interconnecting global trends such as shifting public sentiment, population dynamics and technological innovation.During the last few years the insurance industry, or at least parts of it, has gradually bought into the goals of the divestment movement. Although the divestment movement campaigns against coal, oil and gas projects, insurers to date have focused predominantly on one type of fossil fuel – coal. By the middle of 2018, nearly half of the global reinsurance market were reported to have divested some or all of their assets from coal, after Hannover Re joined Swiss Re, Munich Re, SCOR, Lloyd’s, Generali and the Markel Corporation in announcing its decision to divest from the coal industry. Together, these companies are estimated to control 45% of global reinsurance premiums.3
Six lenses – an integrated approach to geopolitical drivers of risk The six lenses that we deploy to examine geopolitical risk fall into the following categories:
People risk. Safety and security issues can pose clear risks to employees; however, there are also risks associated with workforce management, including recruitment and retention, which must be understood and managed.Investment and return. Exposure across multiple geographic locales means geopolitical drivers of risk can be diverse. In order to protect assets and investments, this diversity of risk must be critically considered and appropriate risk management tools deployed.Business resilience and value chain. When risks materialise as incidents it is crucial to have effective business continuity practices implemented. Response and recovery plans, which have been properly tested, can limit the impact of incidents and help companies quickly resume business operations.Climate and environmental. The risks presented by climate and environmental factors, including storms and earthquakes, can be better understood with advanced analytics. By modelling environmental events and physical assets, risks to property and people can be quantified and managed.Cyber risk. Digital ecosystems and connected devices fundamentally underpin the modern power sector. Having a comprehensive understanding of a company’s cyber footprint is critical to managing this source of risk, including network outages and regulatory impositions. (Please see our dedicated chapter on cyber risk later in this Review for an in-depth analysis.)Reputational risk. Impacts on brand and reputation can affect the ability of a company to attract customers, recruit talent or even to gain an operating license in a country. Being attuned to the relationships between geopolitical drivers and reputation helps anticipate and mitigate these risks.
Using scenarios to bring the lenses to life
Scenario planning uses alternative narratives about the future, many with improbable and radical twists, to develop future-proof strategies. A classic example of the power of scenario planning is the approach pioneered by Shell. When the 1973 oil crisis hit, Shell was better prepared than its competitors because its management had already considered a comparable scenario.
In particular, storylines have been advocated as a better way to provide actionable information because storylines seek to improve risk awareness; these scenarios better correspond to how people perceive and respond to risk5 .
Storyline One - geopolitics of power: people, business resilience, investment and return lenses 6 .
At an international level, the potential for cross-border electricity trading and the creation of grid communities7 raises the opportunity for nations to use inter-state electricity cut-offs as a foreign policy tool. We could see a future where policy changes and embargoes could be applied strategically in the same way as oil and gas sanctions8 , or through network disruptions via state sponsored cyber-attacks.
At a local level, establishing new sites can result in land use conflict and trigger localised political risk9 . The distribution and use of renewable energy can be designed to have a low risk of interacting with conflicts but the success of this depends on the technologies implemented and robust sustainability policies. Having an onsite engagement plan with local stakeholders and an assessment of regional interests will be essential to understand land use dynamics.
We also expect institutional investors to increasingly demand that Environmental Social Government (ESG) risk is addressed before investing in projects in many parts of the world, so this needs to be part of the planning process and outputs used to inform employee risk assessments. Predicting the occurrence and nature of political and social disruptions is nearly impossible. However, investing time in preparing a crisis communication plan is imperative and while it may never be needed, it could save a company’s reputation and protect employees from potential harm.
Scenario planning uses alternative narratives about the future, many with improbable and radical twists, to develop future-proof strategies. Storyline Two - navigating global trade flows: business resilience, investment and return lenses
Understanding and mapping supply chain dynamics below Tier One suppliers and having alternate agreements in place is one way to manage these disruptions. For example, while most of the 17 rare earth minerals found in renewable technologies are not geologically rare, the mining and refining process is resource intensive and produces by-products that require long term planning to reduce environmental impacts10 . China accounts for 80% of the world’s rare earth elements11 ; it is also the largest producer of solar panels, wind turbines, and batteries.
If a trade embargo such as the US government’s attempt to block Huawei’s involvement in 5G networks12 were to hit the power sector, does the industry understand what the impact would be? Do suppliers share common sources further down the chain? Continual engagement with the supply chain to understand what could impact them before it impacts the company itself is only going to become more important, and is mutually beneficial for the whole chain. Understanding the processes and conditions in which assets are moved, continually assessing key vulnerabilities and maintaining a full understanding of the protective measures offered by the logistic operators can be an effective approach to risk mitigation.
2019 saw the first-of-its kind cyber-attack to hit a US renewable energy provider that also intermittently disconnected the generating station from the grid for several hours. Storyline Three - designing for safety and efficiency: reputation, cyber, business resilience lenses With inherently global economies becoming progressively dependent on digital links, it is essential to understand the strengths and weaknesses of these links. Technology has improved resilience to countless threats from an individual level to a societal level. However, increased dependence on connectivity and the reliance on power puts the reputation of companies under the spotlight, as we saw with various power companies that were caught up in wildfires over the last few years.
2019 saw the first-of-its kind cyber-attack to hit a US renewable energy provider that also intermittently disconnected the generating station from the grid for several hours13 . While the impacts were far less serious than the 2015 Ukraine attack and the 2019 wildfires, these examples could form the basis of a disruption scenario for boards to run. While most of the intrusions detected by power companies seem to have been basic reconnaissance operations or intellectual property theft, malicious actors are getting into systems through unpatched vulnerabilities. There are also untargeted risks with malware weapons WannaCry and NotPetya. The range of cyber drivers and vulnerabilities is vast, and the need for cyber expertise or a dedicated Chief Information Security Officer (CISO) have never been more crucial for business resilience.
Delivering cyber resilience is a core part of effective corporate governance for power and renewable energy companies. This year we’ve seen energy companies participating in initiatives such as the World Economic Forum Systems and Cyber Resilience working group to produce guidance and principles that will help board members meet the unique challenges of managing cyber risk in the electricity ecosystem. Cross sector working groups and access to state-of-the art science can play a role in understanding the art of the possible, and our team is tapping in to this knowledge and bringing it closer to our clients through initiatives such as the Willis Research Network.
Conclusion: multiple perspectives to build resilience
In one of our recent articles, General Sir Richard Shirreff set out how the military approach to risk management might help the boardroom14 , and this should be a question that all mature companies ask themselves. What risks are on the horizon and who can speak to them or be invited in to build awareness and understanding? This is where board composition, NED selection, and trusted advisors are increasingly important to encourage a holistic view that recognises and explores interconnectivity of risks.
We would encourage readers to think about the common themes and what drivers and trends might result in risks and opportunities. Are they on your company’s risk register and does your company have a plan for them? For example, for political risks, solutions such as VAPOR15 allow global companies to assess the financial impact of political risk exposure that can feed into your company’s business continuity planning, but if your company examines its supply chain dynamics to understand the impact of the Chilean Water Directive on lithium production16 , then being able to draw on expertise is essential and strong links to the scientific community, e.g. via the Willis Research Network can help find the relevant experts.
Lucy Stanbrough is Emerging Risks research manager for the Willis Research Network at Willis Towers Watson, London.
