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Four key challenges for the power market in 2023 revisited

WTW Power Market Review 2023

By Carlos Wilkinson | November 8, 2023

In this article from the 2023 Power Market Review, we revisit some key challenges from 2022, and explore what we've seen in 2023.
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Climate Risk and Resilience|Economic Challenges|Ukraine war

Back to 2022

At the time of writing our 2022 Power Market Review, we highlighted four global challenges that the power sector faced:

The Russia/Ukraine conflict

We discussed the impact on the European generation mix from having to turn down dependence on Russian gas, the constraints on importing from other sources due to the lack of infrastructure to facilitate this, the inevitable rising cost of gas from other sources and the impact on generation costs and wholesale markets that were expected to remain for some time. We were also faced with the need to reinstate coal generation capacity to make up for lost gas-fired capacity in order to keep the lights on. This was creating concerns among insurers in terms of market volatility and the challenges that they faced in terms of measuring exposures.

Global inflation

Rising energy, commodity and production costs, increased demand for new power generation and transmission infrastructure, together with constrained post-COVID-19 supply chains, were impacting construction and operational costs around the globe. Insurers had significant concerns around the adequacy of insured values, increased claims costs and the need to reflect both in rates and retentions.

The energy transition

The energy transition was driving the shift to new technology and development and growth in new sectors such as Battery Storage, CCUS and Green Hydrogen production. Despite the clear narrative around shift to clean energy, the question remained as to the rate of movement for the various technologies. The insurance market was under pressure to support the transition but from a position where it did not have the historical performance data from which to underwrite with confidence.

Climate change

The impact on climate change, the world’s greatest challenge, was being felt on a number of fronts. The human impact from natural catastrophes on exposed communities is clearly paramount but from a Power sector perspective, generators and utilities were experiencing a range of challenges from increasingly unpredictable and punishing weather conditions. The impact was felt across fuel supply chain disruption, as well as low water levels for hydros and cooling water, low wind levels for wind farms, storm damage to solar and high ambient temperatures reducing gas-fired plant efficiency. All fed market volatility.

The above have been felt throughout the final quarter of 2022 and the first half of 2023 on renewal preparations and terms across all our global customer base. As we warned at the time, strong strategies were required to address the above to:

  • demonstrate clearly to the insurance market that the challenge was understood
  • identify exposures to each and measures in place to mitigate where possible
  • help insurers understand how this impacted their exposures.

What have we seen since?

This year the challenges for the sector are similar, although with some notable changes.

The positive

There has been easing in the gas wholesale markets due to a restructuring of gas supplies away from Russia; global inflation is showing signs of easing as economies respond to higher interest rates; momentum behind the energy transition is clearly growing and the market is showing signs of a more supportive response to risk transfer needs from the sector

Less positive

The potential for global recession could create further uncertainty for generators and markets if industrial demand reduces; transmission networks will come under pressure from a higher reliance on intermittent power, as re-commissioned coal plants are turned off and output from more expensive gas fired plants is turned down; natural catastrophes from weather and non-weather-related events (mainly earthquake) continue at historically high levels, driving major losses across a wider geographic base - we also have the added uncertainty from the return of the El Nino ENSO this year.

So, whilst the challenges sound familiar, the landscape continues to evolve and change with a level of unpredictability that will continue to focus insurers on risk quality and information, well explained asset and revenue values, clear communication, and the need to ensure that terms reflect the exposure.

In this article we investigate the above in greater detail, assess how this will impact markets and consider the measures that can be taken to deliver the best results in an ever-more demanding insurance market.

To read more, please download the full article, below.

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Author

Carlos Wilkinson
Head of Power & Utilities, Downstream Natural Resources, Willis Towers Watson
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Contact

Alex Forand
U.S. Head of Power and Utility Broking, Natural Resources

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