Geopolitical risks apply to almost every area of the economy, and the renewable energy industry is no exception. But how do these risks manifest themselves and how can they be mitigated? 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 desire to build forwards and integrate sustainability is becoming a global trend for COVID-19 loans made by governments, and the interruption of planned investments and budget cycles for other sectors of the energy mix could open the door for acceleration. It will also bring about operational challenges as countries reopen borders and global supply chains start again – this period of relative hibernation will require skills and equipment to be re-tested.
Geopolitical risks for an organisation arise from its unique exposure and vulnerability to multiple, inter-related political, economic and geographical factors that impact its ability to successfully operate and execute its strategy. As 2020 has clearly demonstrated, no risk or stage in project development and maintenance can be considered in isolation. New challenges and risks will unfold when the world emerges from its post-COVID-19 hibernation that, if not managed correctly, could threaten the very resilience and long-term profitability of a project.
It has never been more important to consider new ways in which geopolitical risks can be managed more effectively than by simple insurance purchase. The coming 12 months are going to require a holistic view of risk in an already charged landscape and have also highlighted the need for organizations to create stronger links between their C-suites and operational management to produce the required integrated and rehearsed responses.
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 few years; what’s more, they look firmly set to stay there, given the major shift in energy policy that a Biden-Harris administration will bring in the US. In September 2019, the new European Commission President, Ursula von der Leyen, stressed the importance of the transatlantic relationship to meet current and future challenges, both globally and within Europe1, while the appointment of John Kerry to lead the climate agenda and the position being embedded within the National Security Council2 will likely be welcome news for some markets as well as a closing of a window of opportunity for others.
With changes such as these it has never been more important for the renewables sector to understand these new dynamics. In the middle of 2020, as the pandemic was picking up momentum, the International Renewable Energy Agency (IRENA) announced the formation of a new working group3 with a two-year programme of research focusing on building understanding around the need to explicitly consider geopolitical risks. This group will be supported by a 'community of experts' for each workstream, including stakeholders from other international organisations, regional institutions, academia and the private sector as appropriate. This will be one to keep an eye on and for the sector to feed into as it develops.
Many of us think geopolitics is limited to events in political hotspots and scattered terrorist incidents among Western nations, but it encompasses much more than just war and terrorism. 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.
A data breach will be reported across the world in a matter of seconds and public perceptions of a brand or an organisation can be severely damaged. Worse still, a breach of an electrical grid could shut down whole regions of a country, leading to widespread loss of revenue across a range of industries.
There isn’t one answer to considering geopolitical risk – every company’s exposure is different, and the real value is in uncovering different perspectives to ask useful questions that will build resilience and increase risk understanding.
Analysing the geopolitical risks through ‘six lenses’ and their drivers is a framework approach that will help organisations begin to understand their exposure from a 360° perspective and the interconnected nature of the challenge in front of them. Once an organisation identifies, understands and prioritises the risks it faces, it should be better prepared with response plans, including contingency and crisis management plans. Interconnected risks require integrated solutions that must be tailored and address insurable and non-insurable risks seamlessly.
The six lenses that we deploy to examine geopolitical risk fall into the following categories:
As our contribution to this Review, we wanted to set out three themed scenarios that bring our Geopolitical Risk lenses to life, and which could be used to construct bespoke scenarios for clients. Organisations need to identify and understand their geopolitical risks and the connections between them in order to mitigate the risks and seize new opportunities. These scenarios provide stress tests for renewable energy companies to stretch their thinking, and to do this effectively they will need to:
Scenario planning uses alternative narratives about the future, many with improbable and radical twists, to develop future-proof strategies. They are also becoming increasingly interesting to investors and financial institutions as a way of surfacing information around companies’ understanding and management of climate risks.
These can range from fully quantified scenarios, that harness data from digital twins to provide a live view of risks, to qualitative storylines that require no technical experience to decipher and correspond to how people perceive and respond to risk.4 Both approaches are valid and should be considered as different tools in the box to challenge and support thinking.
As we have seen during 2020, there is value in considering extreme versions of your risk list and scenarios with secondary impacts to stress test your thinking and processes. The unfamiliar is not the improbable; the real value is in identifying the stress points and then considering why these will cause issues, so that any future investment, strategic decision-making or operational changes can enhance overall resilience.
While the distribution and use of renewable energy is often designed to have a low risk of interacting with many hazards - and we’ve seen the resilience in the face of this pandemic - there are other systemic risks that may be considered extreme but still plausible. One serious threat to the reliability of electric power is geomagnetic storms – severe disturbances caused by solar storms in the upper layers of our atmosphere that induce currents in long conductors on the Earth’s surface, such as power lines.
Globally, risks to electric grids are greatest at the higher latitudes since the largest currents are ‘funnelled’ towards the poles. Depending on the geology of a given region, the currents a geomagnetic storm induces in the power lines can destabilize the power grid’s operation and can damage or even destroy transformers. In 1989 the transmission system for Canada's Hydro Quebec electricity provider collapsed during a solar storm, leaving millions of people without power for nine hours or more5. In 2003 similar storm triggered blackouts in the city of Malmö, Sweden, and may have caused transformer failures in South Africa6.
The worldwide geophysical community has been warning against this risk for years - much like pandemics, it is a case of not if but when. Within the US, new research by the US Geological Survey (USGS) points to Minnesota, North Dakota, and Wisconsin needing to take extra precautions against this kind of solar “weather”7. The study is two thirds through mapping the country, so companies with operations in the south and southwestern regions should look for the final results during 2022. While the cycles of activity happen over a longer timescale, and it can be tempting to focus on more immediately apparent risks, investments in new technology and business continuity plans should incorporate this event into planning so there are operational plans for how to respond. Cyber planning often uses the complete compromise of equipment and may form a useful basis for integrated thinking.
From an operational perspective, a new power transformer could be replaced in two months, if there’s a spare one nearby – but it is more likely to take anywhere up to two years to deliver8. Investing time in preparing a business continuity and crisis communication plan is imperative; while it may never be needed, it could save a company’s reputation and protect employees from potential harm. As we’ve seen this year, with countries and even some states competing for the same resources, having a plan is essential.
Despite calls by many for a green recovery from COVID-19, there is also a risk that operational survival and other risks take priority. One area that needs to be promoted up the agenda is the decommissioning and recycling of obsolete technology. Calls to build forwards and focus on electrification could lead to further investments in research and development to accelerate energy efficiency that sees more iterations in the field. New processes and technology will need to be developed to recover valuable materials and prevent environmental hazards - solar panels contain toxic materials such as lead that can leach out as they break down9.
This will also create a resource challenge with geopolitical connotations. Owning a key component, or ‘node’ in a supply chain gives a company or nation leverage over the entire network10. There are a small number of dedicated recycling firms providing this service but, with so many different types of renewable energy on distinct technology pathways, meeting this challenge will need both supportive policies and regulations and for companies to factor this into their strategic planning. In the European Union, producers are required to ensure their solar panels are recycled to defined standards11. In Japan, India, and Australia12, recycling requirements are under development, and in the US, only Washington has a state law13.
Proactive climate action and partnerships to meet these challenges will put organisations at a competitive advantage, given that all listed companies and large asset owners in the UK are expected to make disclosures using the Task Force Climate-related Financial Disclosures (TFCFD) guidelines by 2022. Working to evidence the ESG elements outlined in the two climate risk articles in this Review will be essential. The pandemic crisis has also shown that an organisation’s corporate brand is very important for its performance and a clear climate agenda is increasingly a lever for corporate reputation.
People-induced risks to your business exist in every geography you operate in. As employees began to work from home in compliance with the lockdowns around the world, this exposed their organisations to increased cyber risks and breaches – because data normally accessed in the secured office environment is now taken into homes. Organisations will need to improve their cyber and business resilience to continue to operate in this way and maintain their reputations.
There are also far reaching impacts that may emerge in this new environment. Whether your employees are working remotely, or they’re back in the workplace taking new safety measures and precautions, the changes, disruption and isolation they’re facing have the potential to increase their stress levels. Social distancing is essential to protect our physical wellbeing, but it could potentially increase the risks around emotional, financial and social wellbeing14.
In Europe, the COVID-19 pandemic threatens to spark a new wave of Euroscepticism and populist politics. For instance, in Italy, the first epicentre of the pandemic in Europe, a poll found that 88% of its people felt the EU had failed them – which could provide fertile ground for anti-Europe campaigns, radicalisation of malicious actors, and internal employee dissatisfaction. Against industry-wide challenges of talent shortages and recertification needs after national lockdowns, there is a complex web of people-related issues to navigate, but which can be explored through risk culture surveys and managed through talent strategies to reduce risks. Risk managers should be asking themselves whether they are confident that the far-reaching impacts of a pandemic on their people and business are understood.
If organisations can pre-empt the changes in the way businesses and the economy will operate in the ensuing six to 12 months, they can move from reacting into strategic planning; this will help to gain a competitive advantage in the new normal and improve resilience. This is essential because all the other risks are still in play – cyber-attacks, floods, earthquakes, terrorism incidents could, of course, all still occur. This structured, evidence-based approach provides an effective framework to assess, quantify and mitigate geopolitical risks in an integrated fashion; it also allows the development of Red Teaming initiatives that use an adversarial approach to challenge or test the adopted plans and thinking, and risk register stress testing. The ability to use Red Teaming to get c-suite and operational risk managers around the table with external voices can bring about intra- and inter-organisational insights that shines a light on the human elements of decision making and operations. It isn’t all negatives – the COVID-19 experience may bring opportunities, such as the opportunity to evaluate different and more cost-effective ways of working, build a more resilient society, larger home markets and establish more reliable supply chains. Whatever the size of your organisation, geopolitical circumstances demand a high degree of engagement and understanding. Risk professionals need to be able to identify and understand geopolitical risks, their drivers and the connections between them, so they can mitigate the risks and seize new opportunities. This is the approach that our geopolitical team takes, and it reduces the possibility of blind spots. Different functions within businesses need to look at these connected risks collectively and manage them using an integrated approach. They need credible and up-to-date information and relevant risk insight and analytics to see the potential impacts to their business. In short: risk leaders need to speak to their CEOs and boards about geopolitical risk.
Lucy Stanbrough is Emerging Risks Hub Leader for the Willis Research Network at Willis Towers Watson in London. Lucy.Stanbrough@willistowerswatson.com
1 https://www.atlanticcouncil.org/blogs/new-atlanticist/experts-react-von-der-leyen-outlines-vision-for-europes-post-covid-future/ 2 https://thehill.com/policy/energy-environment/527189-biden-selects-john-kerry-for-climate-czar 3 https://irena.org/events/2020/Jun/Members-Advance-IRENA-work-on-the-Geopolitics-of-the-Energy-Transformation 4 The summer reader’s guide to scenario planning https://www.willistowerswatson.com/en-GB/Insights/2019/08/the-summer-readers-guide-to-scenario-planning 5 https://www.nationalgeographic.com/news/energy/2011/08/110803-solar-flare-storm-electricity-grid-risk/
6 https://www.nationalgeographic.com/news/energy/2011/08/110803-solar-flare-storm-electricity-grid-risk/ 7 https://spectrum.ieee.org/energywise/energy/the-smarter-grid/us-regions-most-vulnerable-solar-storms 8 https://www.nationalgeographic.com/news/energy/2011/08/110803-solar-flare-storm-electricity-grid-risk/ 9 https://www.researchgate.net/publication/342671383_Metal_dissolution_from_end-of-life_solar_photovoltaics_in_real_landfill_leachate_versus_synthetic_solutions_One-year_study 10 https://www.nature.com/articles/d41586-020-02499-8 11 https://ec.europa.eu/environment/waste/weee/index_en.htm 12 https://www.wired.com/story/solar-panels-are-starting-to-die-leaving-behind-toxic-trash/ 13 https://ecology.wa.gov/Waste-Toxics/Reducing-recycling-waste/Solar-panels 14 https://www.willistowerswatson.com/en-GB/Insights/2020/08/lets-talk-wellness-managing-employee-mental-health-in-a-pandemic
