The world’s energy market is at a critical crossroads amid an ongoing energy crisis. Issues of energy security and the clean energy transition will assume national relevance at the upcoming Group of 20 Leaders’ Summit in Bali this month as a landmark green energy deal between Indonesia and several nations would see massive funding being secured to scale up the country’s renewable energy sector.
This is good news for Indonesia, which is behind the curve with unrealized renewable energy development that could provide more than six times its energy demand. However, with traditional sources of energy still needed to meet current demand, the deal will also provide investments to renew and upgrade current infrastructure to allow Indonesia’s power plants to reduce carbon emissions as part of a much-needed energy transition for the industry.
The deal will boost Indonesia’s energy transition plans, but other factors are creating a more complex risk environment for the country’s critical power sector. After deforestation, coal power generation is the second-largest source of carbon emissions in the country. With government plans committing to completely move away from fossil fuels over the next 20 years, it is vital that power sector undergoes an orderly energy transition.
However, many factors will influence the sustainability of energy transition in the power sector, including the power insurance market. Power companies and investors depend on the insurance market to ensure protection against natural disasters and operational failures. Without this protection, the costs for everyday energy use could soar.
Crucially, the financing required to undertake this transition will only be made available if banks get the assurance that insurance or risk transfer mechanism is available.
There are three major factors influencing sustainability of energy transition.
First, the energy transition has not only led to a major shift towards renewable sources of energy and battery storage, but also new technologies. Key elements of this shift will be the development of carbon capture, utilisation, and storage (CCUS) and Hydrogen. Careful consideration is required as to how these new technologies are integrated into current operations as well as a thorough understanding of the potential risks to energy companies and investors.
Second, global prices continue to rise, with Indonesia’s inflation hitting a seven-year high in September. Rising inflation equals more expensive insurance claims due to higher property and asset values and more complex supply chains. It is critical for power companies to have adequate coverage as the insurance market becomes more sensitive to the impact of inflation.
Third, with more frequent extreme weather events, Jakarta sinking at a rate of 11 inches a year, and sea levels rising, Indonesia is particularly vulnerable to climate change. The impact on the power sector are profound, not only in terms of damage to assets but also in terms of energy output as it transitions to renewable energy sources which can be susceptible to changing weather patterns.
Aside from dealing with legacy issues, the major challenges outlined above will place new pressures on the insurance market. Not only does it need to understand and develop solutions for new or emerging risks and technology, but it also needs to understand those risks enough to create a sustainable insurance market amid rapid changes within the energy sector.
After the impact of COVID-19 on Indonesia’s economy, the government introduced several support measures for its fossil fuel sector. This highlights the dependency on coal to support the economy and meet the region’s soaring demand for energy.
A recent government announcement from State-Owned Enterprises Minister Erick Thohir also laid out a plan for coal power plants to remain active for the next decade. Predictions from the International Renewable Energy Agency (IRENA) and Indonesia’s Ministry of Energy and Mineral Resources suggest Indonesia now show an increase in emissions from the power sector, primarily due to coal, up to 2030.These emissions are then expected to reduce by 2050 to meet net-zero targets by 2060 or sooner.
Support from insurers is increasingly contingent on companies having a viable energy transition plan in line with industry environment, social, and governance (ESG) principles. We will need to pay careful attention to how insurers adjust the balance between green-ideals and the new reality of fossil fuel reliance to overcome the current energy crisis.
In Asia, lowering emissions from existing coal facilities is heavily dependent on new and expensive technologies. While CCUS, hydrogen, and battery storage are expected to proliferate over the coming years, there is little understanding of these risks to date. As much as they may want to support the energy transition, the insurance market will not bear risks it is not able to fully assess.
Bridging this knowledge gap is critical, and buyers that require comprehensive cover to ensure projects are bankable will need to start work with their brokers and their engineers now. Having this alignment with insurers will ensure that the energy transition remains viable.
It is becoming increasingly apparent that climate change is having a profound effect on companies’ risks, both short and long term. It will be essential for power companies to monitor climate change related risks and understand the implications for future investment in the business. With higher frequency of significant weather events happening in recent years, insurers need to see that smart investments have been made by power companies to manage their exposure to climate risk, which would have a direct impact on their insurance cost and coverage.
Companies will have to show their intent to mitigate against climate risk with adequate allocation of funds and plans to implement transition strategies within a reasonable timeframe.
Strict insurance underwriting will continue to be a core element of the power market. Therefore, those looking for insurance in this market need to understand the scale of the challenge and put in place robust risk management strategies taking into consideration how all these factors could play out within their respective organisations.
With this confluence of factors, there has never been a more important time for power companies to engage with their risk intermediary across all their organisation’s activities and levels, to successfully navigate the challenges of the coming years.
This article first appeared in the Jakarta Post on 5 November 2022.
