Limiting the damage, recovering quickly: Confronting the risks to the energy sector

The extreme weather that devastated many Caribbean islands and parts of the United States in 2017 once again demonstrated the urgent need to strengthen the resilience of energy infrastructure, not only in these regions but also across the world. The near total collapse of Puerto Rico's power grid in the teeth of Hurricane Maria was, arguably, the consequence of an inability to invest sufficiently in the resilience of energy infrastructure. Although perhaps a catch-22 situation, one effective way to address the issue is to attract finance from institutional investors such as pension funds, investment funds and insurers. Governments alone cannot cover the cost of establishing reliable energy systems given the increasing risks, of which extreme weather events are just one. So opening energy infrastructures as an asset class to all investors can free up large sources of funding to finance future energy supplies. Moreover, continued development of insurance products is vital to the creation of financial instruments that help close financing and protection gaps. Such instruments would reduce exposure, unlock capital and ultimately reduce costs in the project financing process.

Institutional financing is one of seven recommendations for boosting the resilience of energy infrastructure made in a publication from the World Energy Council developed in cooperation with Swiss Re Corporate Solutions and Marsh & McLennan Companies. Entitled "World Energy Perspective, the road to resilience," the paper also examines emerging risks such as the energy-water-food nexus and cyber risks.

Related to institutional financing, the publication also points to the need for all stakeholders to have a common understanding about the risks involved. They must all be able to compare the costs and benefits of investing in resilience. For example, fully reflecting extreme weather or cyber risks in the cost-benefit analysis of project financing can greatly enhance the project risk profile.

Additionally, the report's authors also say that the traditional concept of strong and safe energy systems (i.e. ‘hard’ resilience) must be accompanied by strategies to prevent and/or absorb potential failures, and ensure rapid recovery after a hazardous event (i.e. ‘soft’ resilience). Black-starting capabilities, that is to say the ability to start a system independently after blackouts of critical system functions is a key component of this concept. Similarly, systems must allow for partial system failure while ensuring they maintain basic functions, as a way to control impact.

Other recommendations include the avoidance of 'monoculture risks' in agriculture and food supplies, as well as among IT sector services. The publication also cites the increased use of off-grid energy systems and better supply of low-carbon energy as ways to improve energy security.

Supporting financial resilience

Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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