Tectonic shift: risks go both ways in energy transition
By Justin Delaney, Zurich CEO Australia & New Zealand, and Amit Singh, Managing Partner, Mandala Partners.
Societies and economies across the world have begun, to varying degrees, and with varying success, the process of energy transition.
This transition, from the fossil fuels of the 20th century to the renewable energies of the 21st century, will be a tectonic shift – the defining structural change, certainly of our lifetimes.
Change of this magnitude is complex and will obviously take time. Irrespective, this process is critical for the sustainability of our planet.
However, not surprisingly, much of the focus to date has centred on the risk of the energy grid to climate change, rather than on the risk of climate change to the grid.
Insurers of these critical infrastructure assets are on the front line of risks relating to climate change, including natural disasters and extreme weather events.
To quantify exactly what this risk looks like, how it’s distributed, and how it may change over time, Zurich and Mandala have partnered to create a first-of-its-kind ‘Climate Risk Index’ for the Australian energy generation sector.
Utilising Zurich’s global exposure analysis capabilities, the Index assesses the location of every energy generation asset across the country to form insights on the impact of climate to the grid under differing climate scenarios.
Based on a likely – given current and committed actions – ‘intermediate’ IPCC scenario that assumes two degrees Celsius of warming by 2041-2060, more than a quarter of Australian energy generation currently falls into the three highest climate risk categories. This is set to rise to around 35% of generation capacity by 2050, with nearly 40% of plants and facilities experiencing increased climate risk over this period.
Under a more extreme climate scenario that assumes four degrees Celsius of warming over the same period, 43% of generation capacity will fall in the three highest risk categories by 2050, including 11% of generation in the highest risk category.
The Index also reveals that risk varies significantly by geography and generation type.
WA and the NT, whose electricity grids run separately from the National Electricity Market (NEM), are particularly vulnerable. The NT relies on three smaller, separate electricity systems, whereas WA has two larger interconnected grid systems and 35 smaller grids across the State.
Based on the Index, 96% of generation in the NT is in the highest three risk categories, including 85% of generation in the second highest risk category. WA and Tasmania were found to have 70% and 52% in the three highest risk categories, respectively. Across the other eastern and southern states, the risks were relatively lower. This is predominantly because their connection to the NEM gives them a greater degree of diversification, with any grid risks offset by other states.
By generation type, solar power and natural gas face significantly higher climate risks than other generators. The index found that 95% of dedicated solar generation sites and 54% of natural gas plants were in one of the three highest risk categories. Solar is currently most consistently at risk of disruption from climate perils such as storms and hail. Natural gas plants are more susceptible to heat, drought and flood.
Other forms of renewable energy like wind and biogas/biomass sat alongside coal with a relatively low risk of disruption from climate events.
All of this tells us that while we plan and execute this essential energy transition, we also need to give greater attention to protecting the grid from the effects of climate change. Energy site selection and planning are critical to ensure new infrastructure is resilient, given variability in hazard type and severity is significantly impacted by geography and topography.
This includes achieving a balance between utilising natural elements that will enhance renewable generation capacity, whilst managing the elements that can conversely reduce or halt their efficiency. For example, locating solar farms in areas that maximise light but minimise exposure to hail, or natural gas facilities with dependable access to water (at the right temperature) but with minimal chance of flooding.
Beyond this, adaptation measures are also important for building resilience, particularly for existing sites.
This analysis hopefully represents a constructive input into achieving an appropriate and resilient energy transition. More broadly, it also serves to highlight the quantum of data and quality of insights that are now available to understand the prevailing risk environment so we can shape and prepare our collective response.
Navigating this transition while ensuring security and reliability represents the core opportunity and central challenge to energy policy. Our work does not serve to warn against the energy transition, but to ensure it is a success.
With more extreme weather events on the horizon, we have no time to waste.