Anthony Vassallo, Global Product Leader – Energy and Head of Energy & Construction, UK and Nordics, at Allianz Global Corporate & Specialty (AGCS), discusses the ongoing impacts of the global energy crisis and its galvanizing effect on the net-zero transition.
This article is part of the
Global Risk Dialogue - 01/2023
Q: What are the long-standing consequences of the global energy crisis and how has this impacted the green transformation?
Anthony Vassallo
Anthony: We recently published our annual Allianz Risk Barometer survey in which the energy crisis appeared for the first time [1]. The overreliance of major European economies on cheap Russian gas had been credited with fueling economic growth for years, but Russia’s invasion of Ukraine created economic and political shockwaves that will take years to subside.
Coinciding with French nuclear reactor maintenance, droughts in Europe affecting hydropower, and the Nord Stream gas pipelines attack, it is clear why energy costs rocketed in 2022.
Supply chains looked fragile. Loss situations that used to be addressed in six to 12 months have taken 50% to 100% longer due to shortages of components and supplies. Replacement costs have increased at rates not seen in decades.
On the risk side, as businesses seek an alternative to gas, there are hazards associated with reactivating or upgrading redundancy systems that have been unused for a while, carrying out delayed maintenance, or running plants harder after a couple of ‘slow’ years.
Nonetheless, we are presented with an opportunity: the acceleration of the energy transition. Legacy energy players and new entrants are driving investment, with spending on the global net-zero transition surpassing $1trn in 2022 [2].
The winter of 2022-2023 was mild overall in Europe, with reduced heating requirements. Liquefied natural gas (LNG) import facilities were built across Europe, there were favorable conditions for wind and hydro power, and French nuclear plants came back online.
Energy prices are returning to levels last seen before summer 2022, but are still above long-term averages. As economic growth materializes, industrial energy demand will rise. The switch to renewable energy needs to accelerate, or even with near-full storage facilities Europe could be short if there is a bad winter in 2023-2024.
Q: AGCS is already an established insurer of wind and solar energy. What trends and developments are you watching in the renewables space?
Anthony: Insurance has a key role to play in supporting the growth of renewables through both risk transfer and unlocking access to finance. We are seeing opportunities materialize in terms of energy storage, hydrogen, and carbon capture projects. We expect this trend to continue and, indeed, accelerate. A recent example involves the construction of one of the world’s largest renewable energy hubs, to produce, store, and deliver hydrogen in the US.
The attention placed on energy security in recent months has raised the profile of energy storage. The demand and supply of energy have to be balanced, and as renewable power sources expand, so, too, will the need for energy storage. The intermittent nature of some renewables such as wind and solar also fuels this need. Future energy-storage systems are likely to be varied and complex, calling for proactive risk management and diversification. We regard optimized energy storage as an essential element of the energy transition.
The significant investments in transition technologies and infrastructure, boosted by the energy crisis, will come to fruition much earlier than could have been foreseen. We are watching the expansion of green hydrogen closely. It is made using renewable energy so it has great potential to decarbonize high-emitting industries if deployed at commercial scale and we expect production to ramp up significantly in the medium term. Hydrogen is also showing promise as an energy-storage solution if it is converted from intermittent renewable sources. Also promising are battery energy-storage systems using lithium-ion batteries, if fire safety concerns can be overcome.
Q: What are the emerging risks associated with the energy transition?
Anthony: Risks vary with the technology deployed. The vulnerability of solar PV (photovoltaic) to natural catastrophes is evidenced by recent loss activity. Europe endured a year of unprecedented hailstorms in 2022, with France suffering record insured losses of almost $5bn [3]. These risks could be heightened by climate change.
Offshore wind is challenged by the risks of ever-larger turbines, as well as the hazards of natural environments such as the North Sea. Maintenance is complex and can be dangerous. Emerging technologies can bring significant benefits but also new risks, such as floating wind power, which has exposures connected to mooring and cabling.
Hydrogen production uses technology our engineers are already familiar with, but presents challenges from the rapid expansion of the market and newcomers within it, as well as risks from leaks and fires. Energy storage using lithium-ion batteries has raised concerns about the dangers of ‘thermal runaway’, a phenomenon that has been implicated in several serious fires in recent years.
Q: How is AGCS supporting customers in the drive to decarbonize?
Anthony: We are committed to integrating net-zero targets into our insurance and investment activities, so we can support clients in adapting to low-carbon business models. We have the capacity, engineering expertise and underwriting experience to apply to transition activities and green energy projects. We are proactively looking to engage with clients, both existing and future, on how we can achieve mutual objectives. It is really about a partnership approach to transitioning to net zero together.
AGCS has implemented a market-leading oil and gas policy that gives us a platform to have these conversations with our customers, enabling us to better understand their plans and ensure they align with our objectives.
Roughly half the capex going into the green/renewables space originates from legacy energy players. We have seen how many insurers (including Allianz) have addressed the coal issue. There were doubts around the efficacy of adopting such policies but we have seen their positive impact on the market environment.
Our Allianz Risk Consulting team can provide risk expertise around electricity transmission, solar, offshore wind or hydrogen operations. We can allocate our capital to the exposure and provide the risk transfer solutions clients need to facilitate ongoing investments.
We are mindful that at a portfolio level we need the capacity we deploy to generate returns for our shareholders. This will require careful underwriting and understanding of the exposures we take on. Data, information, and a willing client base that wants to partner with us will go a long way to achieving this.
Biography
Anthony Vassallo joined AGCS straight after completing an economics degree at Durham University and has enjoyed a varied career over 20 years with the firm, working across Europe, Asia and South America. A rugby fan and foodie, he was an “unsuccessful” contestant on the reality TV show Masterchef.
References
[1] Allianz Risk Barometer, January 2023
[2] BloombergNEF, Global low-carbon energy technology investment surges past $1 trillion for the first time, January 26, 2023
[3] Swiss Re, Severe 2022 hail damage in France sets new benchmarks, underscores shift of risk and calls for pricing adjustments, November 15, 2022
Images: AdobeStock
The material contained in this publication is designed to provide general information only. Projections are inherently subject to substantial and numerous uncertainties and changes. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the projections made in this publication. While every effort has been made to ensure that the information provided is accurate, this information is provided without any representation or warranty of any kind about its accuracy and Allianz Global Corporate & Specialty SE cannot be held responsible for any mistakes or omissions.
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Anthony Vassallo
Global Head of Natural Resources, Global Product Leader (Energy), Regional Head of Energy & Construction London & Nordics
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