Although global investments in renewable energy plants are growing and indeed in 2010 exceeded investment in new fossil fuel fired plants for the first time, risk is also increasing, according to a new report, Managing the Risk in Renewable Energy, from the Economist Intelligence Unit (EIU). Sponsored by Swiss Re, the research highlights the need for the renewable energy sector to improve risk management and access alternative sources of capital as operational risks grow and governments cut sector funding on the back of an increasingly uncertain economic environment.

Based on a survey of 284 senior executives in the renewable energy industry in North America, Australia, Denmark, Spain, Italy, Germany and the UK, the report analyses the risks in financing, constructing and operating renewable energy projects, particularly large complex projects, and the parallel risk management challenges that the industry must confront.

Cuts in government expenditure for the renewables sector pose the possibility of a lack of future support from public finance for such developments, particularly in Europe. Currently, cuts for example, in solar feed-in tariffs range from 15% in Germany to 70% in the UK and there is the worry for investors that other governments will cut this support as part of their ongoing austerity measures, according to the EIU.

Early-stage costs are a major issue as projects are often capital intensive and highly leveraged, with up to 70-80% financed through debt. As companies seek to scale up investments overcoming financial risks is one of the key challenges, according to respondents. Other concerns for owners, operators and plant investors are political and regulatory risk and weather-related volume risk particularly for offshore wind farm producers. These risks moreover increase as projects grow in scale and complexity, but only half of respondents said they were successful in transferring the risks, many retained the risks related to renewable energy assets on their balances sheets. The availability of risk management resources, such as industry data, risk expertise and insurance remain limited in the sector, potentially restricting access to development capital.

However as the demand for solutions grows new products, particularly in insurance are starting to appear on the market such as alternative risk transfer solutions and weather-based financial derivatives, for example. Respondents considered however that they would transfer more risk if suitable products became more widely available especially if there were more standardised and cost-effective products.

For further information visit EIU.

Companies in Japan and South Korea have the highest overall performance on ESG issues, according to a new report from global responsible investment research specialists EIRIS. Improvements in these countries have been boosted through local initiatives such as the recent introduction of the “Low Carbon, Green Growth” initiative in Seoul, which outlines a plan to reduce carbon emissions, with a similar scheme operating in Japan.

The report focused on 786 Asian companies to assess how well they were addressing ESG challenges and comparing their performance to their European and North American peers. China, Hong Kong and Singapore based companies however have failed to make significant progress on ESG factors, according to EIRIS. China, for instance, the world’s second biggest economy, has made limited improvements on environmental issues, with only 5% of the companies analysed by EIRIS having strong environmental policies in place and just 2% displaying any proof of making progress on these issues.

The report, State of Responsible Business (Asia) found that Asian companies performed well on climate change but still needed to address other ‘material’ environmental risks arising from water management and biodiversity. Social stakeholder issues remain a key challenge, the report revealing that 90% of Asian companies with operations in countries “relevant for human rights concerns have no human rights policies in place.”

When comparing Asian companies to their global peers though an uneven picture emerges; the environmental polices of over 40% of Asian companies were assessed as good or excellent, compared to two-thirds of European companies, however only a quarter of North American companies received similarly high scores.

“It’s encouraging to see that companies in Asia are making progress on ESG and are overtaking their global peers in some areas. Looking ahead, increased regulatory pressures, greater reporting requirements and the development of sustainability have the potential to be the biggest drivers of ESG,” said Mark Robertson, Head of Communications at EIRIS.

There are big opportunities for companies and investors “to exploit the first mover advantage presented by enhanced social and governance disclosure in Asia,” considers EIRIS. Increased coverage of social and governance issues will open Asian companies to a broader investment base, especially outside Asia, where responsible investment is more firmly established.

For further information visit: EIRIS website.

Hot on the heels of India’s microfinance industry comes microinsurance, as insurers increasingly see the profitability of addressing the needs of those on very low incomes. From a base of six insurers in 2000 there are currently 48 in operation, and of these 36 are collaborations with foreign insurers. The life insurance market therefore is set for rapid growth according to a new report from Celent a Boston (US) based financial research and consulting firm.

India’s Insurance Regulatory & Development Authority (IRDA) has recognised the potential of microinsurance to address the needs of the poor for some time. IRDA issued microinsurance regulations in 2005, which has spurred insurers, both public sector and private, to develop a wide variety of microinsurance products.

A number of business models are currently in operation, these include service provider, partner-agent, delinked and direct marketing. Out of these the partner-agent and delinked models have been more successful due to their greater reach and the involvement of local institutions with close relationships with target customers.

Reaching these customers though in a country as large as India is not easy. Whilst urban areas are fairly easy to access, rural India with over 600,000 villages is more challenging. Technology also has its limitations, particularly due to low literacy rates in rural areas. A number of distribution channels are in use in rural areas aimed at reaching the greatest number of potential customers. These include public and private sector banks, rural and cooperative banks, NGOs, microfinance institutions, self-help groups, agents, post offices and internet kiosks.

Life insurance products often prove more popular than non-life insurance and this is the case in India, where non-life insurers are entering the sector at a slower rate. The number of new life policies has risen from 13.2 million in 2008 to 19.8 million in 2010 (of which 16.8 million were group insurance policies). India’s public sector Life Insurance Corporation, with its huge, well established network, sells the majority of these policies.

“India has a large population below and marginally above the poverty line,” said Anshuman Jaswal, Senior Analyst at Celent and author of the report, Life Insurance in India: Potential and Pitfalls. “Microinsurance can be a crucial medium to provide risk coverage to these people, and innovative channels should ensure that it remains a viable proposition for insurance firms.”

There are though a number of regulatory issues which still need addressing. The main one is that insurers should have more leeway in designing and pricing their microinsurance products. “If IRDA forces them to sell products, then the viability of the entire industry could be called into question,” considers Celent. Another issue is consumer protection, the regulator needs to show a greater level of enforcement regarding the boundaries insurers should respect when selling their microinsurance products.

For more information visit Celent website.

As the pressure to obtain energy from renewable resources as a way of reducing energy costs, securing supply and curbing carbon emissions increases, high on the agenda is tidal energy – harnessing the power of the tides to produce electricity.

Around the UK there are several tidal turbine projects underway most notably on the islands of Orkney and Islay and in the Pentland Firth, Scotland. One of the most ground-breaking schemes to the south of the UK though is happening in the powerful coastal waters around Alderney, the third-largest of the Channel Islands.

Alderney’s waters are regarded as one of the most accessible tidal power resources in Europe – tides rise and fall by as much as 20 feet, producing currents averaging 10mph capable of generating up to 3GW, enough electricity to power at least one million homes.

Since 2007 Alderney Renewable Energy Ltd. (ARE) has been exploring the potential for a small array of tidal turbines in Alderney’s waters. In 2008 ARE was granted an exclusive 65-year license by the island’s government, the States of Alderney (States), to explore and develop 50% of Alderney’s territorial waters, an area of around 50 square miles. The company then sold a 20% stake to OpenHydro, an Irish energy company specialising in tidal power technology. OpenHydro has demonstration tidal power projects in the Pentland Firth, Bay of Fundy, Nova Scotia, Canada and Paimpol, France.

Now all the hard work that has gone into research, business plan developments, sourcing investment and ongoing work with the States is bearing fruit. ARE is seeking to build and operate a tidal pumped storage system to begin producing power for Alderney. The system will consist of up to four seabed mounted tidal turbines (model still to be decided) of 1MW each 3km offshore in the Race (a fast flowing tidal race between Alderney and the French coast) and a pumped storage system with a seawater reservoir in Fort Albert a large ruined cliff top fort, one of several Victorian forts on the island.

Working with the local electricity board, power generated from the tidal turbines will be fed into the seawater pumps so the seawater reservoir will power a 2MW hydro turbine powering the generators supplying Alderney’s electricity demands.

Currently, as well as being reliant on conventionally generated electricity, Alderney is also heavily reliant on expensive imported oil and calor gas for heating and cooking purposes, so the power generated by the tidal turbine project will be a boon, capable of supplying Alderney’s present power demands, of which 90% will be from renewable energy, and soon - the objective is to have the system operational by 1st July 2012.

A full Environmental Impact Assessment (EIA) is currently underway, which is set to be completed by end-May 2011 involving local organisations like Alderney Wildlife Trust, the Alderney Society and outside consultants in order to assess any effect the project may have on the environment. Consideration is focused on marine life and seabed impact plus the effects on flora and fauna along the route of the pipeline, plus the impact on the structure and historical significance of Fort Albert. If all goes according to schedule the EIA should be completed by end-May 2011.

The project though still requires planning consent from the States for onshore works and marine operating consent from the Alderney Commission for Renewable Energy, who is independently assessing the project.

Funding will be provided by vendor financing during the construction phase, then after six months of successful power generation and approval by ARE’s vendors’ engineers a debt finance package will be put in place to replace the vendor financing scheme.

Future Developments:
Although this is initially a small-scale project, ARE is already looking at the bigger picture. Alderney is in a unique position, as a Crown Dependency, it is not formally part of the UK or the EU, which opens up a number of routes to market but means it has been ineligible so far for government green incentives. However a recent EU ruling permitting any member state to obtain renewable energy from outside the EU should qualify ARE for government support.

Although currently there are no power cables to or from Alderney, ARE holds the right to export power to both the UK and France. After successfully lobbying both the UK and French governments ARE has developed advanced plans for cable connections to both these countries. ARE acquired 285 MW capacity into the French Grid in 2008 and 2GW capacity into the UK grid in 2010. Alderney’s peak electricity demand is only around 1.5MW so the electricity generated by tidal power in excess of this will be exported.

Alderney’s tidal resource therefore has the potential to become a major contributor in assisting the UK and France to achieve their stated 2020 renewable energy targets of 15% and 23% respectively. The French link would connect with two nuclear power stations boosting the amount of zero-carbon power available. “There is a big push in Europe for more interconnection”, said Paul Clark CEO of ARE speaking to SRIB.

As for Alderney the strategic benefits are significant, bringing about independence and security of energy supply, capping escalating energy costs, producing a revenue stream for the States on exported electricity and encouraging economic development on the island.

First in an occasional series, for further information visit ARE website.