Managing risk and seizing opportunities in a changing energy market

Flexible and robust transmission networks are critical to the success of the energy transition, and transmission system operators (TSOs) with fixed income are focusing on improving operational efficiency, according to WTW.

With the needs of transmission networks expected to grow significantly, TSOs are facing challenges related to investment, connection, and adaptation to new energy sources such as solar, wind, and hydropower.

The existing electricity grid, designed around large power plants, is under pressure to switch to decentralized energy sources. This change drives the production of goods to loading centers, which can create problems in regions with limited transmission infrastructure.

Additionally, increasing reliance on intermittent and climate-dependent energy sources requires flexible grids. WTW said TSOs must invest in development, expansion, and connectivity to meet future energy needs. However, supply chain problems can limit their purchasing power and increase costs.

As TSOs navigate these changes, WTW highlighted the need for risk and finance leaders to develop risk management and financing strategies. TSOs must adapt their risk management approach to address the changing exposures associated with the energy transition. This includes exploring risk retention strategies that allow operators to gradually build operational reserves without depleting their short-term capital.

According to WTW, alternative risk transfer solutions provide TSOs with a stable capital model that can help them build savings to support long-term growth.

For TSOs with established risk management strategies, improvements will be critical to maintaining financial safety and soundness. WTW stressed that risk retention and transfer strategies must be in line with the evolving energy sector, where trends in the insurance market are changing rapidly.

Trends in the onshore and offshore risk management market

Property damage and business interruption trends at TSOs, especially offshore operators, are seeing price increases, according to WTW. Onshore rates have nearly doubled, while offshore rates have more than tripled over the past decade.

“TSO risks are good for the market. TSOs have widely distributed low-concentration assets that are well protected and resilient to disaster-related exposures. Its critical national infrastructure and networks are well-monitored with predictive risk management and asset condition monitoring, and consistent revenue streams to maintain, replace and upgrade assets,” said Carlos Wilkinson, head of energy and resources, downstream natural resources. of WTW.

“The subsea cable market is softening, driven by improving underwriters' loss ratios returning to profitable results and energy being attracted to the market as renewable energy underwriters adapt to cable exposure and the transition from subsea oil and gas to submarine cable,” said Thomas Mallindine, head of energy transformation and development, global business line. of natural resources at WTW.

“Technological advances are being made in the cable space and markets are now free to accept these developments and price accordingly. Appetite is strong for operational risks, but new energy is also entering the market for construction risks where availability is increasing and prices are down 10-15% compared to this time last year,” said Mallindine.

As the transmission sector is more attractive to insurers, WTW said TSOs can increase their risk retention and transfer strategies to take advantage of softening insurance markets.

The company expects that TSOs, with their low risk profile compared to large power generation accounts, may present a growth opportunity for insurers as the energy transition continues.

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