May 18, 2024

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Management Strategies Needed as Power Sector Faces Increasing Risk

4 min read

Owners and operators of thermal and renewable energy infrastructure are navigating new and emerging risks due to digitization of the grid, an uncertain regulatory landscape, and changing environmental and weather patterns. These factors and others are forcing risk management stakeholders to increase preparation and resilience of their organizations.

As digital transformation accelerates in the power and utilities sector, cybersecurity has emerged as the leading risk to the industry. This includes managing vulnerabilities associated with grid connections, EV charging and battery storage, as well as complying with evolving governmental and regulatory cybersecurity monitoring and reporting requirements.

COMMENTARY

The pace of digital transformation poses the dual challenge of keeping up with technological advancements and managing the associated risks. This includes the integration of new technologies into the grid and finding a balance between sustainable and reliable energy sources. Industry leaders are also emphasizing the importance of enterprise-wide risk management approaches, enabled by appropriate governance and technology, to navigate these challenges effectively.

Thermal Power Generation Industry Challenges

The thermal power generation industry is witnessing an unprecedented level of change, driven by technological advancements, regulatory shifts and the imperative of climate change mitigation. Successfully navigating these evolving risks requires a strategic, comprehensive approach to risk management that leverages technology, enhances resilience and anticipates future challenges.

Edward Stewart

Impacts of climate change: The thermal power generation industry is at the forefront of dealing with the impacts of climate change and emerging consequential environmental risks. Utilities are adapting to the increased frequency and severity of extreme weather events such as storms, floods and freezes, which necessitate a focus on crisis response and resilience planning. The challenge extends to balancing the demand for reliable energy supply with the imperative of transitioning to cleaner energy sources to mitigate environmental impacts.

Market pressures: Geopolitical tensions and external market changes present additional layers of complexity. International conflicts and regional tensions affect the transport of crude oil and supply chain, exacerbating delays caused by availability of materials and precious minerals required for increasingly complex and technological-focused critical components needed for grid infrastructure and renewable energy projects.

Digital transformation: Addressing the challenges of digital transformation in the power and utilities sector is further complicated by resource constraints and the need for access to digital tools and technologies. This encompasses the deployment of data analytics, detection and monitoring systems, and process automation to enhance risk management capabilities.

Emerging risks in renewable power generation: In the renewable power industry, particularly in sectors such as wind, solar, and battery energy storage systems (BESS), several new and emerging risk management considerations exist. These considerations span technical, operational and strategic aspects of renewable energy projects, reflecting the industry’s evolution and increasing integration of these technologies into the global energy mix.

Thermal runaway: Thermal runaway is a critical risk for BESS, leading to fires that can damage adjacent cells and propagate the reaction. Effective risk management includes thermal management, fire suppression and design layouts that isolate batteries from each other.

Recent incidents globally have emphasized the importance of addressing these risks from construction through operation, including sophisticated battery management systems, gas detection, explosion prevention and robust emergency response plans.

The rapid development and innovation within the BESS sector necessitate continuous evolution of standards. A holistic approach to BESS design, covering all aspects from fire protection features to engagement with emergency services, is crucial for project safety, reliability and insurability.

For both solar and wind projects, assessing the estimated maximum loss (EML) or maximum foreseeable loss (MFL) is vital for managing insurance premiums and optimizing project finance. Engaging in insurance discussions early with a specialized insurance broker can help manage these costs effectively.

Weather-Related Events

Recent examples in Texas underscore the devastation caused by natural catastrophes such as severe convective storms and hail. A historical fear of warehouse owners and automobile dealerships, utility-scale solar farms often covering hundreds or thousands of acres are increasingly exposed to golf ball-sized hail, shattering solar panels and rendering them useless.

Similarly, wildfires, once considered a problem for Western U.S. states, are now a risk for owners and operators across the country. Longer periods of warmer and drier weather exacerbate the risk of fueling wildfires.

The uncertain nature of weather phenomena creates a great deal of uncertainty for insurers, and where ambiguity exists, insurance underwriters seek out higher premiums to cover risks. High deductible limits used to be a way to reduce premiums, but it is increasingly common for insurers to reduce their exposure to frequency events in high-risk parts of the country (such as Texas) and make asset owners responsible for those losses.

The energy industry faces a complex array of new and emerging risks in addition to the legacy more traditional risks they have managed. Effective risk management strategies must address the technical risks associated with these technologies, navigate operational exposures, and adapt to evolving industry standards and regulatory environments.

The integration of renewable energy sources into the grid underscores the importance of advanced planning, technological innovation, and strategic investment in mitigating these risks and securing the long-term viability and growth of clean energy and renewable power projects.

Edward Stewart is senior vice president at Alliant Insurance Services.

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