As Britain undergoes its latest political drama it is worth remembering that, half the world away, Australia has just emerged from what many called its "climate change election".

Whilst it saw some outlying results, such as former Prime Minister Tony Abbott losing his seat to an independent, Zali Steggall, who had put climate change front and centre of her campaign, overall it saw voters reject parties running on a pro-climate agenda. It is fair to say it was not the transformative result many expected with most pundits, and even Northern Territory's famed 'psychic crocodile' Burt, stumped.1

Australia's relationship with the climate is contradictory; its greenhouse gas emissions per capita are higher than Britain or France, yet it is among the global frontrunners in its renewable energy adoption.2 One certainty is that as Australia shifts into new and alternative methods to meet its power needs, the risks to which insurers are exposed are shifting in subtle and untested ways.

Australia – Renewables' Land of Plenty

Australia's drive towards renewable energy is largely state-driven and consequently take up varies between the states; varying between 9.5% (in Queensland) and 95.9% (in Tasmania).3 Although the take up of renewable power generation varies from state to state, at current rates Australia is predicted to generate 50% of its electricity from renewable sources by 2025 and, according to some estimates, 100% by the early 2030s.4 Indeed, the Australian Capital Territory, Tasmania and South Australia are due to generate 100% of electricity from renewables within just a few years.

Australia has so far managed this with a fine balance between traditional large scale infrastructure projects and innovate collective generation schemes.

In 2018 alone 1.55GW of rooftop solar was installed (218,195 installations) meaning that, on average, households saved approximately A$540 per annum on their energy bills. It is interesting to see Australia take advantage of its natural solar resources and to see Australian citizens using solar as a way to minimise household bills.

The sheer volume of uptake has led to some very innovative power solutions, exemplified by schemes such as South Australia's Virtual Power Plant or the Home Battery Scheme.

The Virtual Power Plant acts to effectively apply a 'cloud' model to power generation supplementing the grid. In other words, rather than one fixed asset generating electricity, households will install solar panels and batteries and provide their excess power to the grid. For now the Virtual Power Plant remains in a test phase.

Similarly, the Home Battery Scheme has seen the South Australian government offering households a rebate and low interest loan to purchase batteries which can store solar-generated electricity, ultimately reducing reliance on the national grid.

Notably, such schemes are not unique to Australia. A similar system has been developed in Germany with around 30,000 units in operation in Europe and 40,000 worldwide.5

There has also been investment in large-scale renewable energy projects. This has come from both state and private sources; famously Elon Musk offered to build the Hornsdale battery project in fewer than 100 days (if he took longer he said that he would not charge anything). It was completed in 63. Recently this delivered 100MW into the national grid in under 140 milliseconds following the Loy Yang coal power station unexpectedly tripping offline.6 It also reduced frequency control ancillary services costs by A$40m.7

It is not only in South Australia that there have been issues with fossil plants; in 2018 New South Wales' coal and gas plants broke down 27 times.8 It has led to arguments in some corners that renewables represent, if anything, a more reliable source of energy than fossil-fuel methods. The extent to which this is the case (as opposed to simply reflecting inevitable emerging issues with aging plant equipment used in the fossil industry) will no doubt emerge over the coming decade. The Grattan Institute has published a report demonstrating that the energy system has become more reliable with greater amounts of renewable energy. However, this does require cooperation from industry with the Australian Energy Market Operator managing demand (in part through encouraging large energy users to enter voluntary shutdowns or load shedding in return for money).

Australia has also seen a number of federal and state level initiatives to boost power. These have led to major hydro-power projects such as Snowy 2.0 (a scheme to radically increase generation capacity of a pumped-hydro system) and Tasmania's planned Battery of the Nation initiative as well as a number of major new inter-state interconnectors, among other projects.

Retaining the Ashes

In spite of this, it is clear from the results of the Australian elections that Australia remains wedded to the coal industry. The coalition have, among other plans, backed a major Queensland coal mine and have offered to underwrite the 1320MW Vales Point coal power plant, as well as examining the feasibility of new coal plants.9

The success of the coalition in the election is a clear reminder that, in spite of the major inroads being made by renewables into Australia's energy market, coal remains an immovable force within the power generation landscape. For all of the excitement and the increasing rates of adoption which renewables have seen within Australia, they remain very much supplementary to the fossil fuel industry. In 2018, 79% of Australia's energy was generated by fossil fuels, with only 21% being renewables generated.10

Impact on Insurers – Cover for the next century

Australia's long-term transition towards renewable energy is likely to lead to a number of interesting issues for insurers. With methods of renewable energy generation bifurcating into large scale infrastructure projects and 'cloud' type generation networks, two very different types of future claim have the potential to emerge. Major infrastructure projects still represent enormous potential individual exposures with the possibility of issues emerging during construction, the risk of start-up being delayed (and the consequent costs implications), as well as operational risks once the project is 'online'. The potential cost exposure of these projects is substantial. By way of example Snowy 2.0 (a largescale hydro-storage facility) will cost at least A$5.1bn to complete,11 whilst it was estimated in March 2018 that the Battery of the Nation project (another pumped hydro-power project) would cost A$4.5bn (not including A$2-3bn for transmission upgrades).12 Whilst a loss on a project of such a scale could be immensely damaging, the likely exposures are at areas with which the industry has previously grappled and for which underwriters will be able to price appropriately.

Conversely, as new forms of energy production are brought to market a number of questions arise which would not, traditionally have been considered and the threat of duplicated-insurance could potentially arise. Would an inherent defect on a 'cloud-style' power network be covered under a home policy or a traditional energy policy, who would bear responsibility for a cyber-attack, are the exclusions in each policy fit for purpose and how will underwriters scope contingent BI in a commercially effective manner. Such questions are only complicated by conflicting ownership of components (ownership of hardware can vary from scheme to scheme) and the inevitable uncertainty surrounding Federal climate policy post-election.

Whilst there are unquestionably risks involved in Australia's rush to adopt renewable solutions, there are, at least for insurers, a number of potential upsides (beyond the obvious increased premium revenues). As insurers come under increasing political and financial pressure to consider the long-term impacts of climate change, renewables represent a growth market within the energy space, with significant political support and vast scalability. For insurers looking to diversify their risk portfolio (and to minimise their climate risk-exposure) renewables will no doubt present a tempting offer. However, it is not simply direct benefits that insurers can expect to receive. By way of example in a 2018 report the World Economic Forum identified that the risk Australian businesses were most concerned about was Energy price shocks. Renewables are less prone to supply-side price alterations than many other forms of energy supply, similarly (as discussed above) many consider them to be more reliable that traditional fossil-fuel methods of power generation.

For now, there remain a number of questions for insurers, almost an inherent issue in any emerging industry. As the understanding of these new risks develops and the market develops a greater understanding of dealing with new types of emerging claims insurers will hopefully be left with fewer, if not quite no, worries.

Footnotes

1 https://www.ntnews.com.au/news/the-race-is-over-burt-the-psychic-croc-has-picked-saturdays-election-winner/news-story/f38616bb23fca38fedaf8a6e8d32b6cb

2 It is doing so at a rate 4-5 times faster per capita than the EU, USA, Japan and China (http://re100.eng.anu.edu.au/news/2019-02-06.php).

3 Whilst the fastest (Tasmania) has achieved 95.9% (https://assets.cleanenergycouncil.org.au/documents/resources/reports/clean-energy-australia/clean-energy-australia-report-2019.pdf)

4 According to research published by the Australian National University – although this claim is disputed (http://re100.eng.anu.edu.au/publications/assets/100renewables.pdf) (https://climateanalytics.org/media/fact_check_anu_11feb2019.pdf)

5 https://sonnenbatterie.co.uk/households-replacing-power-stations-germany-sonnen-putting-largest-virtual-battery-its-kind/

6 Clean Energy Australia Report 2019, Page 49. (https://assets.cleanenergycouncil.org.au/documents/resources/reports/clean-energy-australia/clean-energy-australia-report-2019.pdf)

7https://www.pv-magazine.com/2018/12/05/south-australias-tesla-big-battery-saves-40-million-in-grid-stabilization-costs/

8 https://reneweconomy.com.au/nsw-under-pressure-to-move-quickly-on-renewables-as-coal-clunkers-fail-52833/

9 https://www.smh.com.au/federal-election-2019/what-the-morrison-government-promised-to-do-next-20190518-p51ore.html

10 Clean Energy Australia Report 2019, Page 9. ( https://assets.cleanenergycouncil.org.au/documents/resources/reports/clean-energy-australia/clean-energy-australia-report-2019.pdf)

11 https://www.abc.net.au/news/2019-04-09/snowy-hydro-2.0-cost-and-timeline-blows-out/10983998

12 https://www.afr.com/business/energy/solar-energy/hydro-tasmanias-5-gw-battery-of-the-nation-dwarfs-snowy-20-20180228-h0wt6b

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