Is the insurance industry ready for the climate innovation boom?

“The beautiful thing about an emerging industry like the renewable energy space is that we get to see innovation,” said Clay Fuchs (pictured), area assistant vice president – casualty broker for Risk Placement Services (RPS). “The inflation Reduction Act is a 10-year piece of legislation, and over the next 10 years, we’re going to see so much more innovation.”

The insurance industry must be ready to support this innovation boom by underwriting the risks that accompany them and by generating risk transfer solutions. “The good news is that we already have an idea around some of the loss potentials coming from these types of industries,” Fuchs said. He cited the risk of catastrophic fires and explosions, and of pollution events such as from lubricants used in wind turbines.

Fuchs also noted: “One of the major innovations that we’ll see moving forward is in hydrogen, and there is some potential for catastrophic-type claims coming from hydrogen due to its combustibility.”

Despite the uncertainty surrounding the loss potentials, Fuchs is confident that risk management strategies with emerging climate technologies will also rise. “As hydrogen technology comes online, for instance, I think we’ll see more [innovations] with safety in mind, from storage, to production, to utilization in the field,” he said.

Read more: Marsh launches insurance facility for hydrogen energy projects

Another point of innovation that insurers should keep their eyes on relates to batteries. The Inflation Reduction Act introduces game-changing incentives for standalone energy storage.

“What I potentially see, from a consumption perspective, is batteries being placed closer to an end user,” Fuchs shared. “In the past, battery storage was at the generation point, such as connected to a wind turbine farm or a solar farm. But in the future, we may have batteries stored within the community.”

For example, battery storage near medical districts would provide a reliable source of clean energy for hospitals. During peak periods of energy use, hospitals can also utilize batteries to ease the overall load on the grid.

Fuchs also weighed in on the future of nuclear energy: “Some people see that the benefits are well worth a risk. But one of the problems with nuclear is that there are major upfront costs with it. I don’t think that we’re prepared to pay the upfront costs that come with nuclear energy.”

Other renewable energy sources such as wind, solar, geothermal and hydrogen are much more easily scalable and flexible, and don’t have the catastrophic claim scenario that a nuclear power plant presents, he added.

Despite the rising costs for key materials to make solar panels and wind turbines, the International Energy Association predicts that by as soon as 2026, global renewable energy capacity will be equivalent to the current fossil fuel and nuclear capacity. This represents a more than 60% increase in global renewable energy capacity from 2020.

Aside from the robust growth, environmental, social, and governance (ESG) priorities will be a strong motivator for insurance companies to support renewable energy. Fuchs said: “There is so much interest in being part of the clean energy future. This is something that insurance carriers will want to be on the forefront of.”

Read more: New insurance exposures stemming from renewable energy initiatives

The new legislation is providing financial certainty for companies to commit and grow in the renewables space. “I think one of the major goals of the inflation Reduction Act is creating a backstop for the renewable energy industry. We’re seeing innovation throughout the industry, and we’re seeing them getting bigger and more efficient,” Fuchs pointed out.

“There’s still lot of exposures to consider, and it’s all just coming up. But the insurance industry needs to anticipate where all this technology is headed, and how energy insurance can expand beyond solar and wind.”