Managing risks and capturing opportunities in a shifting power market

Flexible and resilient transmission networks are crucial to the success of the energy transition, and transmission system operators (TSOs) with fixed revenues are increasingly focusing on improving operational efficiencies, according to WTW.

With demands on transmission networks expected to grow exponentially, TSOs face challenges related to investment, interconnectivity, and adapting to new energy sources such as solar, wind, and hydroelectric power.

The existing power grid, designed around centralised large-scale power plants, is being pressured by the shift towards decentralised energy sources. This shift is pushing generation assets further from load centres, potentially creating bottlenecks in regions with limited transmission infrastructure.

Additionally, the increased reliance on intermittent and weather-dependent power sources demands more flexible grids. WTW said that TSOs must invest in upgrades, extensions, and interconnections to meet future energy demands. However, supply chain issues may limit their purchasing power and drive up costs.

As TSOs navigate these changes, WTW highlighted the need for risk and finance leaders to optimise risk management and financing strategies. TSOs must adapt their risk management approach to address the changing exposures tied to the energy transition. This includes exploring risk retention strategies that enable operators to build operational reserves gradually without depleting their short-term capital.

According to WTW, alternative risk transfer solutions offer TSOs a stable capital model that can help them establish retention mechanisms to support long-term growth.

For TSOs with established risk retention strategies, optimisation will be critical in maintaining security and capital efficiency. WTW emphasised that risk retention and transfer strategies must keep pace with the evolving energy sector, where insurance market trends are shifting rapidly.

Onshore and offshore market trends for risk managers

Property damage and business interruption trends for TSOs, particularly offshore operators, are seeing rate hikes, according to WTW. Onshore rates have nearly doubled, while offshore rates have more than tripled over the past decade.

“TSO risks are good for the market. TSOs have widely distributed assets with a low concentration of value that’s typically well protected and resilient to catastrophe-related exposures. Its critical national infrastructure and the networks are well monitored with predictive risk management and monitoring of the condition of the assets, and steady revenue streams to maintain, replace and enhance the assets,” said Carlos Wilkinson, head of power and utilities, downstream natural resources at WTW.

“The subsea cable market is softening, driven by improving loss ratios for underwriters who are now returning to profitable results and capacity being attracted to the market as renewable energy underwriters become more familiar with cable exposures and upstream energy underwriters transition from offshore oil and gas to offshore cable,” said Thomas Mallindine, head of energy transition and development, natural resources global line of business at WTW.

“Technological advancements are being made in the cable space and the markets are now becoming more comfortable in accepting these advancements and pricing accordingly. Appetite is stronger for operational risks, but new capacity is also entering the market for construction risks where coverage is broadening and rates are coming down 10-15% compared to this time last year,” Mallindine said.

As the transmission sector becomes more appealing to insurers, WTW said that TSOs can optimise their risk retention and transfer strategies to take advantage of softening insurance markets.

The firm anticipated that TSOs, with their lower risk profile compared to larger power generation accounts, may present a growth opportunity for insurers as the energy transition progresses.

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