Chronicle Editor
Gibson Mhaka, [email protected]
WHILE the rapid growth of renewable energy production, which depends on natural resources and phenomena such as sunlight, wind, water, and biomass, has breathed hope into global efforts to reduce greenhouse gas emissions and limit the most dangerous effects of climate change, an invisible problem looms as many insurers have been slow to help the sector overcome its growing pains.
Although the renewable energy insurance market has seen a significant shift in recent years, with insurers increasing their engagement to capitalise on the sector’s growth projections, especially amid the movement to net-zero carbon emissions, research has shown that many insurers have been slow to offer coverage for the very types of ambitious clean energy projects that will keep the country away from the climate cliff.
Zimbabwe put forward a National Renewable Energy Policy in 2019. The policy aims to have 16,5 percent of the total generation capacity (excluding large hydro) from renewable sources by 2025.
This increases to 26,5 percent by 2030. These are among the goals it has presented at recent climate event agendas such as the United Nations Framework Convention on Climate Change and are promoted in its climate policy.
According to renewable energy experts, to fully seize the opportunity to help transition to a lower carbon future, the insurance industry must formulate a consistent forward-looking pricing model for new risks and support large-scale, complex risks.
Speaking during a stakeholder consultation workshop on the Accelerated Partnership for Renewables in Africa (APRA) recently, the Permanent Secretary in the Ministry of Energy and Power Development, Dr Gloria Magombo, expressed optimism regarding the renewable energy sector, saying the focus was now on promoting its development.
“We have partnered with the International Renewable Energy Agency, Germany, Denmark, the United Arab Emirates, and the European Union as a whole to come together with different stakeholders within the energy sector,” she said.
“Our aim is to identify areas where we need to develop our capacity to improve the environment for their participation, but most importantly, to identify potential funding sources for projects, as the key challenge in the past has been funding.”
Dr Magombo noted that while there are already a number of renewable energy projects being funded locally, the Ministry is now actively seeking direct foreign investment to further develop the sector.
It also emerged during the workshop that over 120 Independent Power Producers (IPPs) had already been registered.
It is important to note that although the government has pledged its commitment to working with investors, insurance experts argue that without insurance, it is difficult to secure financing for clean energy projects.
Despite numerous risks facing the renewable energy market, including climate issues, casualty deterioration, social inflation, and geopolitical conflict, insurers remain optimistic about the sector’s potential.
They contend that the insurance industry can play a crucial role in helping the economy transition to alternative energy sources and mitigate the impacts of climate change by facilitating capital for clean technologies and protecting people and businesses.
Presenting during the third session of the 2024 Insurance and Pensions Commission of Zimbabwe (IPEC) and National Social Security Authority (Nssa) Journalists Mentorship Programme, IPEC director of pensions and life assurance supervision, Mr Cuthbert Munjoma said since 2018, a total of US$57,3 million has been invested in six renewable energy projects in Zimbabwe.
“Investments in renewable energy, such as solar and mini-hydropower plants, financed by insurance companies and pension funds, are feeding into the national grid. Since 2018, a total of US$57,3 million has been invested in six renewable energy projects.
“The Zimbabwe Electricity Transmission and Distribution Company (ZETDC) is the main off-taker of power produced by Independent Power Producers (IPPs). Offtaker agreements are also being established between IPPs and exporting companies, such as mining houses.
“Obtaining an Environmental Impact Assessment (EIA) certificate from the Environmental Management Agency (EMA) is a key requirement for obtaining prescribed asset status. The overarching objective of these investments is to create an environmentally friendly and sustainable economy,” said Mr Munjoma.
It is clear from Mr Munjoma’s presentation that Zimbabwe has been making significant investments in renewable energy projects since 2018, demonstrating a growing commitment to clean energy.
This investment aligns with global efforts to reduce greenhouse gas emissions and mitigate the effects of climate change.
There is no doubt that insurance promotes the flow of capital for innovative new technologies that facilitate the transition to a lower carbon economy.
Research has shown that insurers play a crucial role in transforming volatility into opportunity by closing the protection gap and assisting individuals and communities.
They actively contribute in areas such as mitigating physical risks through strategies like parametric insurance, and enabling capital for innovative clean technologies by de-risking investments, offering longer insurance policy terms, and supporting government policies.
By taking these actions, insurers can help facilitate the transition to a low-carbon economy and mitigate the impacts of climate change.
Insurance Council of Zimbabwe (ICZ) research analyst Mr Kundai Jonga said although renewable energy insurance offers insurers an opportunity to meet their Environmental, Social, and Governance (ESG) requirements through inclusive insurance products, the main challenge associated with renewable energy projects is that they are capital-intensive projects that typically involve offshore financing.
“The main challenge associated with renewable energy projects is that they are capital-intensive projects that typically involve offshore financing and offshore financial services, including offshore insurance. This means that there are limited opportunities for local insurers to provide their services to these large projects,” said Mr Jonga.
He said climate change-related risks, such as extreme weather events, have highlighted the importance of insurance coverage.
“This has led insurers to adapt and develop climate-resilient products for non-commercial entities, such as weather index and yield index insurance for small-scale farmers.
“Given that climate change-related risks have only recently become a major concern, the issue of limited data and trends directly impacts the setting of appropriate insurance product pricing. Additionally, lack of awareness affects the reach of products designed to address climate change-related risks,” he said.
Another insurance expert, Mrs Alice Shumba, the managing director of FBC Insurance, said while insurers in the past focused on a limited number of participants in the sector, there are now more players, including the private sector, contributing to energy generation, thus expanding the opportunities for insurance business.
“The growth in solar and wind energy generation activities presents increased revenue opportunities for the insurance industry.
“However, the rapidly changing technologies pose challenges for insurers as they try to keep up with the exposures and pricing matrices.
“Many of these innovations lack historical data on their vulnerabilities, making it difficult for insurers to rely solely on manufacturer’s guarantees and not user and performance experiences, which would assist in independently analysing the exposure.
“Risks associated with energy storage are sometimes overlooked, yet they significantly increase the fire risk in the event of improper storage.
“Another major challenge faced by insurers is the high exposure to weather elements for most renewable energy projects. Extreme weather events can result in catastrophic losses for insurers with very little to salvage,” said Mrs Shumba.
Turning to how insurers are adapting their products and services to meet the evolving needs of the renewable energy sector, Mrs Shumba said they are developing specialised insurance products such as Parametric Insurance.
“This type of insurance pays out claims based on the occurrence of a predefined event, such as a cyclone of a certain intensity, rather than the actual loss incurred. This helps provide quicker pay-outs and reduces the complexity of claims,” she explained.
Despite the optimism surrounding the renewable energy sector, there are perceived risks associated with investing in renewable energy projects in Zimbabwe that could deter potential investors.
An energy expert, who wished to remain anonymous for professional reasons explained: “These risks include infrastructure challenges, such as access roads, communication, and grid capacity, which can affect the reliability and efficiency of renewable energy projects.
“Market risks, including fluctuations in energy prices and market demand, can also impact the profitability of these projects.”
Addressing the reasons for insurers’ hesitancy in offering coverage for clean energy projects, the expert said limited historical data on renewable energy projects in the region can make it challenging for insurers to accurately assess risks.
“High capital costs associated with these projects can increase the potential financial exposure for insurers. Unclear or changing regulatory environments can also create uncertainty, impacting their willingness to provide coverage,” the expert said.
According to the Willis Towers Watson (WTW) Renewable Energy Market Review 2024, a global advisory firm that provides risk management, insurance brokerage, human capital, and capital management services, achieving profitability in the renewable energy insurance market has been challenging due to frequency and severity risks.
“Frequency risks are associated with understanding the technical elements of the assets being insured, which can be complex and vary significantly between different types of renewable energy projects,” the report noted.
“Severity risks, on the other hand, are related to natural catastrophe events and the limitations of global natural catastrophe modelling systems in accurately assessing the potential impact on renewable energy assets.
“Changing power and utility market dynamics also present challenges for insurers. Many renewable technologies have lower sums insured than their carbon-based alternatives, making it very difficult for insurers to maintain their market share of written premium by supporting the new low-carbon technologies,” the report reads in part.
It is important to note that several countries, particularly developed nations, have demonstrated effective climate risk insurance programmes. Germany, for example, has a well-developed insurance market with comprehensive coverage for natural catastrophes and agriculture.
Japan, with its long history of dealing with natural disasters, has developed sophisticated insurance products to mitigate their impact.
In India, the government has launched several initiatives to promote climate insurance, such as the Pradhan Mantri Fasal Bima Yojana (PMFBY), which provides insurance coverage to farmers against crop losses due to natural calamities.
While these countries have made significant progress, it’s important to note that climate risk insurance remains a complex and evolving field, and challenges persist in many regions.
Renewable energy expert Mr Blessing Jonga said limited funding for renewable energy projects in developing countries can have several negative effects on their growth.
“When funding is scarce, fewer projects are prioritised, leading to a slowdown in development. Existing projects may also stagnate due to a lack of resources for continued development and maintenance. Additionally, insufficient funding can hinder the ability to maintain and upgrade existing renewable energy infrastructure, limiting their long-term viability and efficiency,” said Mr Jonga.
Climate change specialist Mr Tawanda Collins Muzamwese echoed these concerns, saying a limited insurance market in the renewable energy sector can also have several negative consequences for achieving global climate goals.
“The consequences of a limited insurance market in the renewable energy sector are obviously financial losses. It is essential for stakeholders in the renewable energy sector to strengthen the bankability of projects and make them financially viable in order to build a strong case for insurance coverage.
“Insurance companies and renewable energy developers can collaborate more effectively by sharing information, building capacity, and providing technical assistance on climate risk.
“Developers of renewable energy projects should proactively alert their clients about the potential climate change risks and the associated threats to their assets,” said Mr Muzamwese.
He said insurers should offer innovative insurance products and actively contribute to the development of the climate insurance market.
“Without market development, there will be limited interest from potential customers. By adopting a pragmatic approach, stakeholders can minimise risks and ensure a more sustainable future,” he said.
Bongani Ndlovu
Online Reporter