Energy transition faces challenges amid climate change and economic uncertainty

Energy transition faces challenges amid climate change and economic uncertainty – AXIS | Insurance Business Asia

Insurance News

Energy transition faces challenges amid climate change and economic uncertainty – AXIS

Most businesses anticipate negative impacts due to the ongoing climate crisis

Insurance News

By
Kenneth Araullo

AXIS Capital Holdings has released a new report titled “Navigating Risk in the Energy Transition,” which examines how key risks impact the shift to renewable energy.

Based on independent research, the report explores climate change, economic volatility, investment challenges, insurance, and governmental support.

The report’s findings highlight that climate change is both a driver of change and a source of risk, posing threats to physical assets and broader business operations. It also notes a gap between the urgency to advance the transition and the logistical reality of meeting net zero targets.

Global economic conditions have made securing finance for renewable energy projects more expensive and challenging. Although public policy has propelled the energy transition, additional government support is deemed essential for continued progress.

AXIS notes that the insurance industry has the opportunity to play a more proactive role, moving beyond a transactional mindset to support customers comprehensively.

Vince Tizzio (pictured above), president and CEO at AXIS commented that shifting to a lower carbon economy requires collaborative efforts from businesses, governments, communities, and individuals.

“In publishing this report, AXIS aims to elevate understanding of the risks and challenges involved in the energy transition and to identify how energy industry stakeholders can proactively and collaboratively support businesses on their journeys,” Tizzio said.

What are the risks facing the energy transition?

The report finds that climate change impacts business operations and influences risk factors such as energy price volatility, supply chain disruptions, regulatory changes, technology disruptions, and extreme weather events.

Over two-thirds (69%) of industrial energy buyers anticipate that the climate crisis will impact their business performance, including revenue, costs, and investments. Key drivers for proactive climate action include long-term business viability (49%), regulatory compliance (49%), and climate concern (47%).

Investment in energy efficiency is identified as a crucial tool for climate action, with 73% of US respondents and 71% of UK respondents investing in this area. However, preparedness to respond to the urgency of the transition is limited, with most respondents feeling only “somewhat prepared” (55%) or “not too prepared” (4%).

While the renewable energy sector is growing, high capital investment requirements and global economic conditions are significant barriers to increasing investment. Nascent technologies often face tougher financing challenges, with 40% of energy producers citing this as an issue, and 33% noting a lack of proven return on investment.

Solar technology is the most popular current investment area, with 63% of UK respondents and 54% of US respondents investing in it. This is followed by battery storage solutions and smart grid technology.

Global economic conditions, marked by rising interest rates and inflation, have made securing finance for renewable energy projects more challenging. Energy price volatility is identified as the major risk factor by industrial energy buyers in both the UK (63%) and US (57%).

The report also highlights the role of public policy in accelerating the energy transition, with 92% of energy producers viewing governments and regulatory bodies as pivotal players. There is a clear call for governments to continue creating investment incentives and addressing the financing gap in the renewable energy sector.

Richard Carroll, global head of energy resilience at AXIS, noted that the report highlights the need for significant investment in technological innovation, risk management, and long-term strategic thinking to achieve net zero goals.

“The energy transition also requires an insurance industry with deep specialty knowledge of the risks associated with the transition, and of the complexities of deploying the technologies to make global net zero ambitions a reality,” Carroll said.

Carrol also stated that AXIS, through its Global Energy Resilience division and AXIS Energy Transition Syndicate 2050, is committed to working collaboratively with customers and partners to address challenges and seize opportunities for a more resilient, lower carbon future.

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