Coal asset stranded risk grows amid insurance coverage challenges: WTW

WTW’s report highlights the struggle between energy security, affordability, and sustainability, leading to continued volatility in the power sector. 

Risk managers should invest in horizon scanning to evaluate their unique risk profiles and collaborate with partners to enhance their awareness. This, in turn, can better inform and guide appropriate risk mitigation, management, and transfer strategies, WTW said in its latest report.

WTW’s report titled "Trilemma of Tension" revolves around the ongoing struggle between energy security, affordability, and sustainability, leading to continued volatility in the power sector. 

This uncertainty is exacerbated by global challenges, including the rising global cost of living, disruptions in the supply chain, and geopolitical tensions. The power sector faces risks on multiple fronts, as explained in the report, with the looming possibility of a recession and sustained inflation.

The review highlights a changing landscape of risks that challenge the power sector, providing insights into:

• Strategies to optimise risk management as budgets tighten and premiums increase.
• Potential risks associated with asset life-extension strategies.
• The potential benefits of parametric insurance for power-related risks.

"The challenges we reported in 2022, such as the Russia-Ukraine conflict, global inflation, energy transition, and climate change, continue to be significant. We've seen some positive developments, including changes in wholesale gas markets and supply diversification away from Russia,”  Graham Knight, WTW's Head of Global Natural Resources, commented.

“There are also signs of global inflation easing as economies respond to higher interest rates and an increasing focus on the energy transition,"Knight added.

"However," Knight continued, "the crisis in the Middle East, triggered by the Israel-Hamas conflict, coupled with the potential for a global recession, introduces further uncertainty for power generators and markets. High levels of natural catastrophes are resulting in significant losses worldwide, and transmission networks are under pressure due to the growing reliance on intermittent power sources as coal plants are decommissioned and gas-fired output is used to balance the system."

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Lyo Foo, Head of Power, Natural Resources Asia at WTW, added, "All of these issues are creating uncharted waters for the power sector as conventional and renewable power generators grapple with the competing demands of energy security, affordability, and sustainability,”

“Going forward, both coal power businesses and insurers anticipate these challenges to persist as investor and policy pressures call for more decisive actions towards decarbonization. Many international insurers have chosen to phase out coal programs and work towards achieving net-zero emissions within their target dates," Foo said.

"Nonetheless," Foo continued, "the increasing difficulty in securing insurance coverage could put coal assets at risk of becoming stranded, which could have severe socio-economic implications for Asia. To ensure energy security and resilience in the region, power businesses and insurers must adapt and cooperate to accelerate their decarbonisation efforts, address insurability and environmental concerns, and strengthen collaboration to manage transition risks in the next phase of Asia's energy transformation."