How Risks Including Climate Change, Economic Uncertainty are Impacting the Energy Transition

Source: 6/13/2024, Location: South America

AXIS Capital Holdings Limited published a new report, Navigating Risk in the Energy Transition. Based on independent research, the report explores views within the energy sector on how key areas of risk are impacting the transition – from climate change and economic volatility, to securing investment, insurance, and governmental support for the expansion of renewable energy technology.

Key findings from the report include:
Climate change is both a driver of change and a source of risk. Climate-related weather events pose a direct threat to companies’ physical assets and an indirect threat to their wider business operations
There is a gap between the urgent desire to advance the transition and the logistical reality of meeting net zero targets
Global economic conditions have made securing finance for renewable energy projects more expensive and challenging
Although public policy has propelled the energy transition forward, additional government support is deemed essential for continued progress
There is an opportunity for the insurance industry to take a more proactive and strategic role in the energy transition, moving beyond a transactional mindset towards supporting customers in a more comprehensive way
Based on a survey of more than 600 energy producers, industrial energy buyers, and specialist insurance brokers in the US and UK, the report also offers insights into how insurers and other stakeholders can more effectively enable the energy transition.

“The shift to a lower carbon economy is among the greatest challenges of our day and requires all of us – businesses, governments, communities, and individuals – to work together to achieve our climate goals,” commented Vince Tizzio, President and CEO at AXIS. “In publishing this report, AXIS aims to elevate understanding of the risks and challenges involved in the energy transition and to identify how energy industry stakeholders can proactively and collaboratively support businesses on their journeys.”

Among the insights to emerge from the research are:

Climate Action
Climate change is a driver of change and a source of risk for businesses –impacting the operational landscape while also influencing other key risk factors
These include energy price volatility, supply chain disruption, evolving regulatory landscape, technology disruptions, and extreme weather events
Over two-thirds (69%) of industrial energy buyers anticipate the climate crisis will impact their company’s business performance including revenue, costs, and investments
The most common drivers for businesses to take proactive climate action are long-term business viability (49%), regulatory compliance (49%), and climate concern (47%)

Strategic Investment
Spending on improving energy efficiency is a crucial tool for climate action and is the most popular form of transition investment (73% US, 71% UK)
This can be interpreted in the context of the recent energy crisis and exposure to fossil fuel and commodity price volatility
Preparedness to respond to the urgency of the transition is limited, with most respondents feeling only “somewhat prepared” (55%) or “not too prepared” (4%)

Renewables Growth
While the renewable energy sector continues to flourish, high capital investments required for projects (35%) and global economic conditions (33%) emerge as two of the most common barriers to businesses increasing investment
Nascent technologies require significant capital to scale-up, often experience tougher financing challenges (40% of energy producers cited as a challenge), and lack the proven return on investment (33% of energy producers cited as a challenge)
Solar technology emerges as the most popular current investment area (63% UK, 54% US) compared to other forms of renewable energy
Solar is followed by battery storage solutions (38% US, 35% UK) and smart grid technology and modernization (36% US, 31% UK)

Economic Conditions
Global economic conditions marked by rising interest rates and inflation have made securing finance for renewable energy projects more expensive and challenging
Asked to identify the major risk factors facing their company, energy price volatility was the most common response for industrial energy buyers in both the UK (63%) and US (57%)

Additional report take-aways include:
Public policy is recognized as having accelerated the energy transition, however, further government support is deemed essential for progress 92% of the energy producers surveyed pointed to governments and regulatory bodies as pivotal players
There is a clear call for governments to both continue creating investment incentives and to help address the financing gap in the renewable energy sector by providing an additional layer of financial protection and guarantee in case of adverse events
There is opportunity for the insurance industry to take a more proactive and strategic role as a risk partner in the energy transition, moving beyond a transactional mindset to offering more comprehensive solutions
Currently fewer than half of energy producers (49% US, 42% UK) perceive insurers as strategic partners that help secure investments related to the energy transition
Further, the survey results show that close to a third (31%) of energy producers believe the insurance industry currently hurts innovation in the energy transition – and attribute this to the lack of comprehensive and multiline coverage options
Removing siloed perspectives can also remove financing constraints – 94% of energy producers want more collaboration and information sharing between project developers, insurers, brokers, investors, and financers

Richard Carroll, Global Head of Energy Resilience at AXIS, added: “The report highlights that energy firms recognize that significant investment in technological innovation, risk management, and long-term strategic thinking are key to achieving net zero goals. The energy transition also requires an insurance industry with deep specialty knowledge of the risks associated with the transition, and of the complexities of deploying the technologies to make global net zero ambitions a reality.

“Through our Global Energy Resilience division and AXIS Energy Transition Syndicate 2050, AXIS is committed to working collaboratively with customers and partners to address challenges and seize opportunities to help to power a more resilient, lower carbon future.”

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