A third of the global economy is thought to be in recession. Supply chain challenges continue to plague industries across the world and inflationary pressures are squeezing margins – even for sectors where profitability was once thought guaranteed.
In the current business-economic environment, it’s difficult to predict what will happen next week let alone next year. But one thing that we should be optimistic about is that the renewables sector continues to defy expectations in the pace and scale of its growth.
As this year comes to a close, and we begin to think about what may be in store for 2023, here are our 5 trends that we believe will dominate the renewables sector and what they may mean for insurers in the space.
5 predictions for the year ahead
1. Nat Cat and extreme weather experiences will force a sharper focus on growing risks
Windstorm and hailstorm damage at solar farms, damage to wind turbine cabling, and numerous issues around battery storage systems have pushed us to take a more cautious approach in recent years. However, 2022 has shown us that we’re not out of the woods when it comes to accounting for the risks that Nat Cat and extreme weather presents.
As recent climate change-related losses add to the ‘perfect storm’ of supply chain bottlenecks, shipping costs and global inflation, 2023 will force developers, owners, and insurers to sharpen their focus on these growing risks. Data, enhanced weather forecasting and modelling need to be utilised better to understand our changing climate conditions and their effects on renewable energy technologies.
2. Rapid rollout of renewables will attract surge of underwriters from traditional energy markets
The Ukraine war and current energy crisis are generating an accelerated push for more renewable energy. The over-reliance on Russian gas has come into sharp focus, and more insurers and brokers are looking to boost ESG compliance through new capital investments in sustainable businesses.
In 2023, we believe that underwriters will be on the hunt to plug the income gaps opened by the general shift away from conventional energy underwriting, creating an intensification of competition and potentially driving softer market conditions. The need for strengthened ESG compliance will also drive this trend, but it is critical that new entrants take a long-term view – instead of buying market share at any price – in order to avoid undermining an already challenged renewables insurance market.
3. Technological innovation and rollout of complex projects will lead to larger losses
Technological innovation in the renewables sector continues to be the lynchpin of progress and has underpinned the sector’s rapid growth and success. But the sector has, to some degree, become a victim of its own success. The race to build newer, larger, more advanced, and complex technologies has come at the expense of quality control, effective risk management, and financial and reputational gains.
The addiction to outpace one another, to come up with the largest, most advanced turbine, or most complex solar + storage project, as just some examples, will lead to larger losses in the year to come. While innovation remains at the heart of economic progress, it must not come at the expense of the sector’s financial stability and reputational gains made in recent years. Bigger is not always better.
4. Europe’s wind power sector will face a tough 2023
Recent news coverage of the challenges faced by the West’s wind industry has captured the dire straits the industry appears to have found itself in. Reported losses are being driven by lingering supply chain issues, intensifying competition from China, rising material and shipping costs, and the inherent market need to create bigger, more powerful turbine models, without selling enough machines to cover the costs.
These interrelated issues will intensify throughout 2023, unless European governments support (and help build) the labour base know-how in turbine manufacturing and enact policies that drive domestic investment. This could mitigate European manufacturers losing contracts in emerging wind power markets, like the US, to their Chinese rivals.
5. Solar market will continue record of stellar growth
The solar market has remained on a strong growth trajectory in the last few years. The installation of PV systems on homes, commercial buildings, and industrial facilities been slowly transforming the way we think about electricity generation and consumption: A technology that was once too expensive for mainstream use has become readily accessible through mass-production and effective government support schemes.
While it would be a mistake to dismiss questions around ongoing supply chain challenges, how the solar supply chain scales up, permitting issues and regulatory roadblocks, it’s safe to say that solar is currently winning in the energy transition. Therefore, 2022 investments in manufacturing, diversification of supply chains and net zero ambitions will converge to generate another stellar year of growth in the global solar market. Insurers will need to work hard to meet this growth and help support the industry as it continues to defy expectations.
Are we right, or are we wrong? Either way, we’d be keen to hear from you. In the meantime, on behalf of the entire team at GCube, I wish you all the best for the festive season and look forward to working with you in the New Year.