Climate risk for renewable energy projects and parametric insurance

Mr. Anuj Kumbhat, Co-Founder and CEO of WRMS

In the context of the global discussion on climate change, the renewable energy sector is at a critical moment. As we grapple with changing weather patterns and rising temperatures, the sector faces significant challenges in maintaining infrastructure and ensuring operational efficiency. Research suggests a 12% reduction in wind turbine capacity by the end of the century and a 1.5% reduction in photovoltaic efficiency for every degree Celsius above 25°C in India. The IEA warns that climate-related damage to India’s renewable energy infrastructure will amount to $18 billion annually by 2050. This highlights the need for innovative risk management solutions, such as parametric insurance, as traditional models struggle to accurately quantify these risks.

Parametric insurance works on a fundamentally different principle than traditional indemnity-based insurance. Instead of relying on the assessment of actual losses, it triggers payouts based on predetermined and measurable parameters directly related to the occurrence of specific events. This approach eliminates the need for lengthy claims evaluation, allowing companies and individuals to quickly receive funds for immediate response and remediation.

In the renewable energy sector, where outages can lead to significant revenue losses, parametric insurance provides quick payouts, enabling companies to resume operations without long-term financial setbacks. Moreover, parametric protection can cover the full financial impact of the loss event, including intangible losses, rather than just physical damages. This flexibility makes parametric insurance a versatile tool for businesses and governments looking to mitigate the financial impacts of climate-related events.

One of the key advantages of parametric insurance is its ability to cover risks that are difficult to assess based on historical loss data alone. Using advanced technology such as satellite imagery and weather data, parametric insurance can precisely determine payout trigger points. This data-driven approach increases transparency and reduces the risk of disputes between insurers and policyholders.

Additionally, parametric insurance can be tailored to the specific needs of each renewable energy project. Insured renewable energy assets in disaster-prone areas receive bespoke structures designed to meet the exact needs of each project. This level of personalization ensures that insurance coverage is tailored to the unique risk profiles of individual projects.

Transparency is another characteristic of parametric insurance. Thanks to clearly defined parameters, renewable energy customers know exactly what events will trigger their insurance, eliminating claim disputes and ensuring transparency of the insurance process. This transparency promotes trust in the underwriting process, which is crucial to supporting investment in the renewable energy sector.

Moreover, parametric insurance encourages proactive risk-mitigation actions. By providing protection based on pre-defined parameters, renewable energy companies are encouraged to strengthen their wind and solar installations to withstand fluctuations in production and the impact of natural disasters on exposed assets. This proactive approach not only reduces the likelihood of losses, but also contributes to the overall resilience of renewable energy infrastructure.

As the global transition to renewable energy sources accelerates, the need for effective risk management solutions continues to grow. According to the forecast of the International Energy Agency (IEA), it is expected that between 2022 and 2027, the percentage of global electricity production from clean energy sources will increase by almost 2,400 GW, or almost 75%. The Energy Transition (ETIP SNET) estimates that by 2050, renewable energy will account for 85% of global electricity production.

To support this transition and balance projected energy demand with the ambitious climate targets set by member states in the Paris Climate Agreement, significant investment in renewable energy is crucial. However, this investment must be accompanied by robust risk management strategies to mitigate the potential impact of climate-related events on renewable energy infrastructure.

Parametric insurance stands out as an attractive solution to mitigating climate risk in the renewable energy sector. By offering faster payouts, eliminating uncertainties related to climate change and providing flexibility for a wide range of climate risks, parametric insurance complements traditional models and contributes to the overall resilience of the renewable energy industry.

Author: Anuj Kumbhat