How to build resilient renewable energy portfolios

In recent years, we have seen an alarming increase in the intensity and frequency of weather events historically forecast as ‘once-in-a-century’ occurrences. These extreme wildfires, floods and powerful storms bring with them potentially severe implications for the physical safety and financial viability of renewable energy projects around the world.

It’s well understood that extreme weather can have catastrophic impacts on traditional energy infrastructure. But as investors increasingly flock to projects designed to mitigate the climate disruption behind these weather events, it’s crucial they recognise that renewable energy infrastructure is far from immune to those same risks. In fact, it may be even more vulnerable to some events than traditional sources of power generation.

Take, for instance, the major storm that struck Fort Bend, Texas, earlier this year. Golf ball-sized hailstones caused widespread destruction to a local solar farm, reducing the system’s power production to partial capacity. Ensuring that photovoltaic assets can withstand such events has always been an issue for their manufacturers. But as storm severity escalates, developers must question whether existing tolerances are enough.

Further south, in Brazil’s Rio Grande do Sul, days of unprecedented torrential rainfall recently triggered extreme flooding and the partial collapse of a hydroelectric plant dam, leading to a devastating loss of life. Only days after the dam ruptured, the local government reported a further six dams were at imminent risk of collapse across the state, with 18 in total demonstrating some level of fragility.

Responsibility post-investment

The transition to a low-carbon energy system is not only necessary to ensure a secure future for humanity beyond 2050, it’s also an enormous opportunity for investors that could add approximately 4 percent to global GDP by 2030. Nevertheless, events such as those in Texas and Rio Grande do Sul underscore the importance of understanding the physical risk climate change presents to renewables portfolios.

Renewable infrastructure projects are often built in areas particularly exposed to harsh conditions because these locations provide the greatest abundance of natural resources to be harnessed for energy production. For example, solar farms tend to be found in flat, open plains with high levels of irradiance, which in turn can mean increased risk of bushfire damage. We had to consider this when upgrading the fire resilience of our own solar assets in Australia, where we have bushfire management plans that include fire breaks to slow or stop a blaze from spreading.

Upgrading resilience can go further than addressing an asset’s physical surroundings. As well as ensuring that structures are designed to be as robust as possible, asset owners have a responsibility to engage with the communities surrounding their projects and make sure plans are established to help them cope with emergencies. For our Brazilian hydropower facility, this has involved working with the local fire and police authorities and setting up a texting process to direct the community on how to respond when a siren sounds. This kind of collaboration can lead to the development of response plans that are tailored to the local context and therefore more effective, while giving residents confidence that emergency procedures are in place.

Insuring against extreme weather

“According to a recent study by Swiss insurance giant Swiss Re, last year witnessed a record 142 natural catastrophes, resulting in $108 billion in insured losses across the world”

Renewables investors should also consider how physical climate risks affect their assets from an insurance standpoint. Extreme weather risks are increasingly becoming a significant liability for insurers, in some cases leading to the tough decision to withdraw from markets where risks – and associated insurance premia – outweigh profitability. Investors should also reflect that it becomes more complicated for insurers to predict and model physical climate risks when assets are held over the longer term.

According to a recent study by Swiss insurance giant Swiss Re, last year witnessed a record 142 natural catastrophes, resulting in $108 billion in insured losses across the world. The same study expects insured losses to double over the next decade due to the impact of changing climates. With natural catastrophes growing in severity as well as frequency, EU regulators are considering including wider risk factors tied to climate change in their recalibration of the solvency formula for insurers. Some jurisdictions are also changing their capital requirement rules for insurers to ensure they can cover losses from large natural catastrophes, exacerbating the issue and potentially further driving up costs for insurers.

These trends may combine to make renewable energy projects far harder to insure, owing to the perception that they are often located in areas at higher risk of insured losses. This in turn could have significant repercussions for the financial sustainability of these investments.

The bottom line

Owning renewable energy power plants is becoming increasingly complex, as the transition to a low carbon economy continues and climate change’s effects become more commonplace. This requires responsible stewardship from owners and an understanding of the environmental risks that are inherent in operating remote projects exposed to the elements.

Failing to do so could have severe consequences for the security of renewables assets, as well as the communities that surround them.

The growth of renewable energy within our power grid is critical if we are to combat climate change. However, renewable energy investors must recognise that rare extreme weather events, even ones forecast using abundant existing data, are likely to occur more frequently in the future. Therefore, incorporating resilience strategies into their portfolios is crucial to future-proofing the investments themselves against climate change.

The author is head of sustainability at Victory Hill Capital Partners, a private equity firm headquartered in London.