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Power sector faces challenging, unchartered waters as “trilemma of tension” endures, says WTW

November 8, 2023

Understanding and managing key risk drivers is essential to navigate the global polycrisis, says WTW’s latest Power Market Review

SINGAPORE, November 8, 2023 – WTW (NASDAQ: WLTW), a leading global advisory, broking, and solutions company, highlights the enduring “Trilemma of Tension” in the global power sector in its 2023 Power Market Review. It suggests risk managers should invest in horizon-scanning to assess their own unique risk profile, and to work with partners to enhance their awareness and better inform and guide suitable risk mitigation, management, and transfer strategies.

The Trilemma, encompassing stress between energy security, affordability and sustainability, has led to continuing volatility in the power sector. The uncertainty is amplified by the global polycrisis, including the rising global cost of living, supply-chain disruptions, and geopolitical tensions. With potential recession looming and sustained inflation, the power sector faces the risk of assault on multiple fronts, the report explains.

The Review highlights the changing panoply of risks challenging the power sector. It includes insights which discuss:

  • ways to optimise risk strategies as budgets tighten and premiums rise;
  • potential risks involved in asset life-extension strategies; and
  • the potential benefits of parametric insurance for power risks.

Graham Knight, WTW’s Head of Global Natural Resources, said: “The challenges we reported in 2022 – the Russia-Ukraine conflict, global inflation, energy transition, and climate change, are ever-present. We’ve seen some positive developments, though. Wholesale gas markets have eased and supply has shifted away from Russia. There are signs of global inflation easing as economies respond to higher interest rates, and growing momentum behind the energy transition.

“On the other side of the equation,” he continued, “the crisis in the Middle East, precipitated by the Israel – Hamas conflict, combined with the very real potential for a global recession, creates further uncertainty for generators and markets. High levels of natural catastrophes are also driving major losses across the continents, and they’ve showed no sign of returning to lower historical norms. Meanwhile, transmission networks are coming under pressure from a higher reliance on intermittent power, as re-commissioned coal plants are turned off and gas-fired output is deployed to balance the system.”

Lyo Foo, Head of Power, Natural Resources Asia at WTW added: “All of these issues are creating uncharted waters for the power sector, as generators of all types, conventional and renewable, seek to balance competing demands for energy security, affordability and sustainability. Looking ahead, both coal power businesses and insurers expect these challenges to persist as investor and policy pressures demand bigger, bolder action towards decarbonisation. Many international (re)insurers have chosen not to put any coal programmes on their books and are gradually lapsing their programmes to achieve net zero within their target dates.

“Yet the growing inability to secure placements could put coal assets at risk of being stranded, resulting in severe socio-economic ramifications for Asia. The region’s energy security and resilience will therefore require adaptation and cooperation from power businesses and insurers, who must accelerate their decarbonisation pathways to overcome insurability and environmental pressures; and strengthen cooperation with one another to manage transition risks and power the next phase of Asia’s energy transition.”

Power Market Review also considers the current state of the insurance market. These include:

  • Profitability in the power insurance market: Guest contributor Ian Green, Head of Power at Rokstone Underwriting, considers the future of the current hard market, which follows 15 years of sliding rates and widening terms.
  • Property risk pricing: The balance of positive and negative influences over prices suggests that the best programmes will see a 2.5% to 5% rating increase, compared to a flat 5% rise last year.
  • International liability: The market appears more focused on rate adequacy than rate movement, with prices stabilising for favoured risks, and average rate increases falling to mid-single digits.
  • Construction: Two decades of falling rates and broadening coverage have since solidified into a hard market. Construction-risk pricing is now stabilising, but project-specific geographical, economic, political, sociological, contractual, and technical risks mean power construction projects face increased insurer scrutiny.

About WTW

At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.

Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.

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