Swiss Re Targets Growth in the $5 Billion ‘Green Risk’ Market
Swiss Re Ltd., the world’s second- biggest reinsurer, is seeking a “significant portion” of the potential $5 billion global market to insure the risks of renewable energy projects, a company executive said.
“The worldwide insurance market for weather derivatives traded over-the-counter is about $2.5 billion in notionals,” Juerg Trueb, head of environmental and commodity markets at Swiss Re, said in an interview in London. “The market for operational and construction risk for renewable energy might be double that size in premiums. We aim at capturing a significant portion of these combined markets.”
So-called clean projects that harness the wind and sun to generate electricity for sale face risks to their revenue such as volatility in the weather, changes in the political support or subsidies available to developments, and insufficient access to funds during times of austerity.
Risks rise as projects get bigger and more complex, driven by governments seeking to meeting regional targets for clean power, Trueb said. Investment in renewable energy power plants overtook that for fossil fuels for the first time last year, according to Bloomberg New Energy Finance. The European Union aims to source 20 percent of its energy from renewables by 2020.
“We believe that risk-taking and risk management is needed to unlock investment in this space,” Trueb said.
‘Acute Hazard’
Financial risk, when projects are unable to get sufficient funds, is the most “acute hazard” for the renewables industry, according to a report by Swiss Re and the Economist Intelligence Unit Ltd. that surveyed 284 energy and finance executives.
Renewable projects may use loans to cover as much as 80 percent of the cost. As the European sovereign debt crisis has worsened, banks are curbing lending, while governments trying to curb deficits have lowered subsidies for clean power. The U.K. proposed a cut of as much as 55 percent in the price for solar power in October, while both Spain and Italy have scaled back their so-called feed-in tariffs for solar energy producers.
Developers may mitigate financial risk by seeking alternative funding, according to the report from Zurich-based Swiss Re.
Political risk is the most difficult to manage, Trueb said. “We don’t feel comfortable with political risks,” he said. “I would be surprised if somebody becomes comfortable to cover the impacts of governments cutting back subsidies.”
Other risks include the use of unproven technologies.
Increasingly Complex
“As projects become increasingly complex, it will be difficult to use only technologies that are known,” said Aviva Freudmann, a research director at the EIU, while closing plants because of damage or failure, as well as fluctuations in commodity prices such as ethanol, are also hazards.
The biggest market for renewable energy insurance is likely to be the U.S. where projects are larger, followed by China and Europe, Trueb said. Africa, where projects may be scattered over a wider area and built on a smaller scale than in other regions, offer opportunities for insurers, Trueb said.
To contact the reporter responsible for this story: Sally Bakewell in London at Sbakewell1@bloomberg.net
To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net
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