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Aspen Opinion

Energy Transition: Aging Networks and New Exposures

December 7, 2015

David Coram

Head of Engineering and Special Risks

Tel: +44 207 184 8960

Renewable energy is bringing challenges to the aging UK grid network, but also to the (re)insurance industry.

European greenhouse gas emissions are targeted to reduce by 80-95% (80% through domestic reductions i.e. excluding international credits) by 2050 against 1990 levels.1 Such a goal entails significant investments in new low-carbon technologies, renewable energy, energy efficiency and grid infrastructure. A pathway has been mapped out to reach the 80% target in 2050 after EU leaders adopted the 2030 climate and energy framework in October 2014 which set three key targets:2

  • At least 40% cuts in greenhouse gas emissions (from 1990
  • levels)
  • At least 27% share for renewable energy
  • At least 27% improvement in energy efficiency

Power has been identified as the sector which has the biggest potential for cutting emissions and should almost totally eliminate carbon dioxide by 2050. Electricity will increasingly come from renewable sources, such as wind, solar, water and biomass, or other low-emission sources, such as nuclear power plants or gas fired power stations.

Figure 1 shows that progress is being made in the renewable energy sphere but figure 2 shows there is still much work to be done. Oil and coal accounted for 46% and 63% of European and global fuel consumption respectively in 2014.3

Figure 1: Global consumption by fuel 2004-2014 % change

Source: BP Statistical Review of World Energy June 2015

Figure 2: Global consumption by fuel 2004-2014

Source: BP Statistical Review of World Energy June 2015

At the recent POWER-GEN Europe 2015 conference, the generation and use of renewable energy and reduction of fossil fuels held centre stage. Lively discussion ranged across such issues as the consequences of the demise of coal, the roadblocks in making the transition to more carbon friendly sources of energy and the fact that one cannot currently rely solely on renewables which are dependent on the forces of nature.

Grid capability

The transition to renewable energy raises particular challenges in terms of grid capability and storage and further development of renewable energy is dependent on viable solutions in these two areas. Wind and solar energy is not a 24/7 manufactured and controlled resource but is dependent on nature and, as such, is open to significant fluctuations. The aging grid system is vulnerable to overload during periods of high wind and sunny days. Conversely, the grid is under-utilized during periods of low wind or darkness. Currently, it can take up to 90 minutes to switch coal fired power plants on or off in order to match supply and demand, so speed and efficiency are key to coping with fluctuations in demand.

Looking to the longer term, the National Grid and Statsnet have entered an agreement to build a 730km interconnector.4 The subsea cable will link the U.K. and Norway and help to power 1400MW of energy which is enough to power almost 750,000 homes.5 More initiatives need to be taken as 20% of the U.K.'s energy supply is due to shut down by the end of the decade. This equates to some 20GW being retired which would supply an estimated 20 million homes.6 Recent power shortages led to the National Grid invoking its "last resort" emergency powers for the first time as it instructed various manufacturing companies to reduce their energy usage to ensure enough power was made available on the grid during peak times.

Gas still has a big part to play in the world of power distribution. Gas supply, unlike renewable energy, can be managed but, unlike renewable, it is finite. The gas turbine manufacturers are researching innovative ways of using hydrogen in gas to ensure we have alternative fuel sources and more efficient fuels for gas turbines. A study carried out by Siemens, Lund University and Gotebrogs Energy has researched the laminar burning velocity in gas for gas turbines which is typically reached through the burning of natural gas with methane and some hydrocarbons.7 In the future, hydrogen is likely to be combined with bio gas and carbon dioxide. Hydrogen shows potential through increasing flammability limits and velocity of combustion in comparison with natural gas. Thus, turbines could reach optimum levels faster hence coping with peak loads in busy periods.

Storage and space

The availability of energy storage would significantly improve the flexibility of the grid system. Flywheels, large battery storage sites, and compressed air are some of the methods under development. A storage target of up to 1.3GW by 2020 has been set in California in order to create more stability on the grids from renewables while one of Europe’s largest batteries, with 10MW of storage capacity, is expected to be in operation by the end of 2015 in Northern Ireland.8,9 The project is the first phase of a 100MW energy storage system for the country which is expected to produce savings of £8.5 million per annum.10

The proposal for an underground train is another solution to the storage problem which, but for construction projects such as Crossrail and the Hadron Collider, might have been considered as something out of science fiction by most. This Dutch proposal envisages a floating railway covering a circular track with a radius of 2.5 km. In periods when too much wind or solar energy is generated, the surplus electricity could be used to set in motion a pure-mass floating maglev train within a vacuum tunnel with a speed of up to 2,000 km per hour. In periods when insufficient renewable energy is generated, this kinetic energy could be re-converted into electricity and fed into the grid. It is estimated that 2.5GW of electricity could be stored for an eight-hour period or 400MW for 48 hours. The proposal has the advantage of being relatively low cost and is estimated to total just 10% of competing technologies that are currently being developed for large-scale energy storage.11

Cost is just one consideration for renewable energy. Space is another. Storage facilities, underground trains and flywheels all need space – and so do solar farms and wind farms. The Mojave Desert solar plant, pictured in Figure 3, covers an area in excess of 7km2.12

Figure 3: Mojave Desert solar plant

Source: http://www.brightsourceenergy.com

Innovation and (re)insurance

Some aspects of renewable energy technology are new. While flywheels and underground trains may have at least in part been designed and commissioned before, they have not been built to the scale that would be required to meet the demands of efficient energy storage. Floating solar farms are another example where crops will be grown in chambers collecting water powered by photovoltaic and tidal energy. What will be the similarities in exposure, if any, between these and existing solar farms? Will re(insurers) need to cover the deterioration of the crops as well as the power and the buildings? Will these structures produce enough solar power to feed a grid system? 

With the innovation of renewable energy projects underwriters will be required to be equally innovative in their approach. Typically, a turbine is considered to have a proven record
within the power insurance industry if it has operated for 8,000 hours. The situation is far from clear when mixed technologies with proven and unproven parts are employed. Will insureds still expect cover from insurers for machinery breakdown and business interruption during testing?

Large scale battery parks raise questions of interdependency between the source and the storage, while pollution is another concern including debris removal in case of fire or natural perils such as earthquake. Alterations to the grid interconnections and the constant stop and start of wind and solar supplies could undermine the stability of the grid and increase the vulnerability of networks. The answer may be to build more local power suppliers and fewer large scale industrial power plants. More local power supply could encourage cogeneration from manufacturers that might entail less waste and pressure on the grid – but perhaps more exposure and liabilities for those underwriting the manufacturing companies.

Risk still needs to be appropriately underwritten with rates set to reflect additional exposures. Wordings need to be well researched to ensure that the cover is appropriate to the client's needs and that aggregation and limits are well understood. All parties concerned in this energy revolution, whether manufacturer, entrepreneur or bank, will need to be fully aware of the prototypical risk and (re)insurers should play the central part in that process but not become the R&D financier of such new endeavours. Given the pressures of the current soft market, some insurers may still be keen to assume the risk regardless of exposure but the more prudent are likely to keep a watchful eye on the terms and conditions and make sound underwriting judgements in an ever-changing global environment.


  1. http://ec.europa.eu/clima/policies/strategies/2050/index _ en.htm
  2. ibid
  3. BP Statistical Review of World Energy June 2015
  4. National Grid, Press Release, 26 March 2015
  5. ibid
  6. http://www.timera-energy.com/the-uk-generation-capacity-crunch-in-numbers/
  7. Energiforsk, Hydrogen Gas As Fuel Source For Gas Turbines, 2015
  8. http://future-energy-solutions.co.uk/energy-storage-is-going-prime-time-in-2015
  9. AES Energy Solutions, Press Release, 20 July 2015
  10. www.aesenergystorage.com
  11. https://www.ecn.nl/news/item/floating-train-at-2000-kmh-set-to-store-10-of-dutch-electricity
  12. http://www.nrel.gov/csp/solarpaces/project_detail.cfm/projectID=57

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