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Insurance Innovation and Investment to Play Major Role in Renewable Energy Future

Posted on Jul 04, 2012 by Sergio Ulloa ()

The developing Green Energy Sector requires new products and increased funding from insurance companies in order to reach its full potential, say Mainstream Renewable Power Chief Accounting Officer Eimear Cahalin and Vestas Chief Specialist James Barry. While some of the more prominent energy systems are sufficiently insured, such as wind and solar power, there have yet to be services to insure the less established technologies, as well as adapt to the growth of existing technologies. Types of needed developments include multi-year products and weather derivatives, according to Cahalin. Currently, the biggest struggle for insurers regarding weather risk is to determine a proper balance between cost and level of risk transfer. In broad terms, weather derivatives are a particular type of contract that insure renewable energy businesses against unfavorable weather conditions, which could potentially negatively affect production. For example, with wind and solar energy these conditions would primarily include wind speed and duration of sunshine respectively. A weather derivative product in the Solar energy sector, for example, would therefore offset risk of lowered solar energy production associated with periods of unduly cloudy weather. Both traditional insurance and weather derivatives act to transfer risk in exchange for premium payment. However, traditional insurance entails high risk-low probability events, while weather derivatives entail low risk-high probability events. Overall, Cahalin would like to see insurance companies create a "fund for innovation", and invest in the renewable energy industry without expecting immediate return. At the Green Power renewable energy risk-management conference she commended underwriters for the health and safety concerns introduced to the industry. Nevertheless, she pointed out that it would be great to see more innovation and products that cover losses during adverse conditions, with coverage paid back through premiums during favorable conditions. Such services could be a potential solution to European investor's, for example, reluctance to shoulder the high risks involved with renewable energy investment. In this way, insurance plays an essential role to both initiate successful financing for beginning stages of projects and protect future potential losses. Besides a current lack of innovative products, many green energy companies have also been forced to shift their focus from banks to institutional funds (held by insurance companies) for financing, due to the erosion of banks' financial strength resulting from the economic crisis. Institutional capital markets on the other hand, provide secure and long-term loans, generally spanning from 5 to 20 years, which is exactly the sort of investment up and coming renewable energy companies need. James Barry, Chief Specialist at Danish wind turbine manufacturer Vestas, noted that in the United States they are beginning to use capital markets instead of the banking market to fund projects. Pension and life insurers investment funds are two potential sources of financing for renewable energy projects, because risks can be structured for these types of investors. However, if these funds are to invest in such projects, governments will have to provide some sort of financial security to them. According to PricewaterhouseCoopers (PwC), many European insurance groups have already displayed interest in renewable energy projects. Previously, the auction of energy firm E.ON's gas transmission company, Open Grid Europe, attracted the likes of Germany-based Allianz and France-based CNP Assurances. The final acquisition, however, was made by a Macquarie Infrastructure and Real Assets (MIRA) association, which includes Munich Ergo Asset Management (MEAG). MEAG is the investment-management firm of reinsurance giant Munich Re and insurance group ERGO. As the renewable energy industry continues to develop, insurers need to adapt their existing products, innovate, and look to invest in green technology. However, recent events like the Solyndra scandal have caused potential investors to rethink their current positions. Controversy surrounding the scandal, in which the Obama administration approved a USD535 million loan to solar panel manufacturer Solyndra, is, of course, subject to debate, and much of it political. But looking at the facts, it is evident that energy-loan guarantees are not a flop, the private market is under-investing in energy technology, and solar is not a "doomed industry". The reasons are as follows: The U.S. Energy Department's loan-guarantee supported close to USD38 billion in loans to 40 projects all over the country ever since its inception in 2005 - Solyndra is only 1.3% of the entire project, and so far is the only investment that has failed; an American Energy Innovation Council's (AEIC) report resolves that "Energy innovation should be a higher national priority," and also encouraged increased public spending for "all aspects of the innovation process."; and finally, one year ago an Ernst & Young report indicated that within a decade, cost-competitive, commercialized solar power could emerge - not to mention ever improving solar storage technologies (molten salt storage) and a projected 24 Gigawatts worth of operations underway in the United States. While PwC stated, quite correctly, that renewable energy assets are "stable, long-term and predictable returns," especially in a time of poor interest rates and investment ambiguity, a change in attitude of institutional investors towards the growing industry is crucial if it is to move forward. Insurance Companies Mentioned Allianz Allianz is a leading financial service provider worldwide. It maintains its leading position in the German market and strong international presence as an insurer through its 142,000 employees worldwide, and 78 million customers in over 70 countries. CNP Assurances CNP has lead France in personal insurance since 1991 with over 150 years experience. It strives to provide each of its 24 million customers high quality services to protect them against risk.
Munich Re Munich Re offers all lines of insurance with roughly 47,000 employees globally. The company centers itself around a business model that comprises of three key aspects - Reinsurance, primary insurance, and Munich Health. ERGO ERGO is one of the largest insurance groups in Germany and Europe. With focus in Europe and Asia, ERGO still has representation in over 30 countries internationally. ERGO is a part of reinsurance giant Munich Re.
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