How to Build Resilient Renewable Energy Portfolios

In recent years, we have seen an alarming increase in the intensity and frequency of weather events that were historically predicted as “once-in-a-century” events. These extreme wildfires, floods, and severe storms have potentially serious consequences for the physical safety and financial viability of renewable energy projects worldwide.

It’s a well-known fact that extreme weather events can have devastating effects on traditional energy infrastructure. But as investors increasingly flock to projects designed to mitigate the climate disruptions that cause these weather events, it’s crucial that they recognize that renewable energy infrastructure is far from immune to these same threats. In fact, it may be even more vulnerable to some events than traditional sources of energy generation.

Take, for example, the severe storm that hit Fort Bend, Texas, earlier this year. Golf-ball-sized hail caused widespread damage to a local solar farm, reducing the system’s electricity production to partial capacity. Ensuring that solar assets can withstand such events has always been a concern for their manufacturers. But as storms intensify, developers are having to question whether existing tolerances are sufficient.

Further south, in Brazil’s Rio Grande do Sul, days of unprecedented torrential rains recently triggered extreme flooding and the partial collapse of a hydroelectric dam, leading to a devastating loss of life. Just days after the dam burst, the local government reported that six more dams were at risk of collapse across the state, with a total of 18 demonstrating some level of fragility.

Responsibility after investment

The transition to a low-carbon energy system is not only necessary to ensure a secure future for humanity after 2050, but is also a huge opportunity for investors, who could add about 4 percent to global GDP by 2030. Nevertheless, events like those in Texas and Rio Grande do Sul underscore the importance of understanding the physical risks that climate change poses to renewable energy portfolios.

Renewable infrastructure projects are often built in areas that are particularly vulnerable to harsh conditions, as these locations provide the greatest abundance of natural resources to use for energy production. For example, solar farms are typically found on flat, open plains with high levels of radiation, which in turn can mean an increased risk of bushfire damage. We have had to take this into account when improving the fire resistance of our own solar resources in Australia, where we have bushfire management plans that include firebreaks to slow or stop the spread of fire.

Resilience can go further than simply addressing the physical environment of assets. In addition to ensuring that structures are designed to be as resilient as possible, asset owners have a responsibility to engage with the communities surrounding their projects and ensure that plans are in place to help them cope with emergencies. In the case of our Brazilian hydroelectric facility, this involved working with local fire and police authorities and establishing a text messaging process to instruct the community on how to respond to a siren. This type of collaboration can lead to response plans that are tailored to the local context and therefore more effective, while also giving residents confidence that emergency procedures are in place.

Extreme weather insurance

“According to a recent study by Swiss insurance giant Swiss Re, a record 142 natural disasters occurred last year, causing insured losses of $108 billion worldwide.”

Renewables investors should also consider how physical climate risks affect their assets from an insurance perspective. Extreme weather risks are becoming an increasingly significant burden for insurers, in some cases leading to the difficult decision to withdraw from markets where risks – and the associated insurance premiums – exceed profitability. Investors should also consider that it becomes more complex for insurers to predict and model physical climate risks when assets are held for the longer term.

According to a recent study by Swiss insurance giant Swiss Re, there were a record 142 natural catastrophes last year, causing insured losses of $108 billion worldwide. The same study predicts that insured losses will double over the next decade due to the impact of changing climate conditions. As natural catastrophes become more severe and frequent, EU regulators are considering including broader climate-related risks in recalibrating insurers’ solvency formulas. Some jurisdictions are also changing their capital requirements rules for insurers to ensure they can cover losses from large natural catastrophes, exacerbating the problem and potentially further raising costs for insurers.

These trends could combine to make renewable energy projects much more difficult to insure, given the perception that they are often located in areas with higher risk of insurance losses. This, in turn, could have significant repercussions for the financial stability of these investments.

Summary

Owning renewable energy plants is becoming increasingly complex as the transition to a low-carbon economy continues and the effects of climate change become more widespread. This requires responsible stewardship by owners and an understanding of the environmental risks that are inherent in operating remote projects exposed to the elements.

Failure to do so could have serious consequences for the security of renewable resources and the communities surrounding them.

The growth of renewable energy in our power grid is critical if we are to combat climate change. However, renewable energy investors need to recognize that rare extreme weather events, even those predicted using abundant existing data, are likely to become more frequent in the future. Therefore, incorporating resilience strategies into their portfolios is crucial to climate-proofing their investments themselves.

The author is head of sustainability at Victory Hill Capital Partners, a London-based private equity firm.