The global shift towards a low-carbon economy and the electrification of energy supply is well under way. As the transition gathers pace and demand for renewable energy projects increases, energy supply chains must adapt and evolve. This change brings opportunity and potential new risks.
Last year, two significant energy transition milestones were reached. In the European Union, the world’s second largest economy, the volume of electricity produced by solar and wind was greater than production from fossil fuels on a 12-month trailing basis for the first time.
Meanwhile, in China – the world’s third largest economy – sales of so-called ‘new energy’ vehicles, including battery-powered and plug-in hybrid electric vehicles, outpaced sales of cars powered by internal combustion engines.
The insurance industry is working alongside energy clients to help them understand and adapt to these profound shifts in demand patterns and their impact on supply chains.
Supply-chain dynamics
One notable change to supply chains is the fact that much renewable energy technology allows energy to be produced locally, rather than relying on imports from a handful of fossil-fuel producing nations. This is viewed by many experts as a positive step towards greater energy security, particularly given the geopolitical uncertainty connected with some of those exporting countries.
On the flipside, however, one country – China – currently dominates the global production of certain materials needed for renewable projects and technology, including solar panels and lithium-ion batteries. It also controls most of the refining capacity for many of the rare earth elements required for these renewable technology components.
Indeed, many of the raw materials that are essential for the energy transition can be difficult to obtain; for example, about 90% of the lithium required to produce lithium-ion batteries comes from just four countries – Argentina, Australia, Chile and China. While other countries – notably the United States – have discovered reserves of these raw materials, it will be some time before they are readily available.
So, the delivery of new renewable systems will require collaboration with new stakeholders or the creation of new supply chains – or both.
Encountering new challenges
The requirement to find new sources of materials and new ways to transport them means that supply chains are changing. And developing, building and expanding new supply chains will bring challenges as well as opportunity for energy clients.
The need to mine ores from new territories, sometimes against a volatile geopolitical backdrop, will bring potential new risks. The interaction of geopolitical uncertainty and a changing climate has been posing challenges for supply chains across all industries, notably in some of the world’s busiest shipping lanes. Recent attacks on vessels in the Red Sea have prompted many shippers to explore new routes, while drought conditions have meant that sections of the Panama Canal have been impassable for certain carriers.
Developing, building and expanding new supply chains will bring challenges as well as opportunity for energy clients.
Shoring up the chain
The insurance industry has an almost unique viewpoint thanks to its experience in quantifying risks across a wide range of diverse industries. This enables insurers to provide insights to supply chain operators that may not be obvious.
For example, transformers are frequently needed for new technology-driven energy transition projects. But they are also used in traditional energy projects too, meaning a potential shortage of supply, particularly if they are damaged by severe weather or storms. Renewable energy developers may not be aware of this potential supply bottleneck without the overview of their insurance industry partners.
The expertise that insurers have built up over decades of supporting projects of all different types will be invaluable in helping to develop the new supply chains that will be necessary to keep the transition on track.
Insurance through the lifecycle
Several areas of traditional insurance and alternative risk transfer mechanisms are already being provided to support energy transition projects by covering supply-chain risks.
Political Risk, Credit & Bond coverages play a vital role in giving comfort to investors about the viability of projects and the reliability of supply in an uncertain geopolitical environment.
Surety bonds can protect project owners against the non-fulfilment of obligations by suppliers. Alternative risk transfer solutions, such as captives, can be used to both insure supplier risks directly or to protect a parent company and free up capacity for supply chain coverages.
Engaging early
Insurers can play a key role in helping energy transition projects to develop their new supply chains. Their knowledge and insights about risk can be ‘baked in’ to the supply chain development process.
Early engagement with insurers on a project is key. The sooner conversations between financier, developer, broker and insurer take place, the better. As the energy transition gathers pace, communication between stakeholders will become ever more vital to ensure that supply chains are robust and projects can go ahead.
To read our recent report, and see the sources of the information in this article, go to ‘Decarbonising the energy value chain: Insurance and supply chain resilience’
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