The conflict in Ukraine has the potential to become an industry-defining event for the global renewables re/insurance sector. In addition to the estimated industry-wide insured losses from wind farms reaching at least $800 million in aggregate, solar energy insured losses could begin to arise, as well. Although it is still difficult to assign an industry-wide insured loss estimate, the role of solar energy in Ukraine’s renewables sector and the extent of reported damage suggests profound implications for re/insurers of renewables.
Background on solar energy
A scan of Ukraine’s national energy strategy, published in 2017, illustrates how the country views renewable energy. While it offers a nod to climate change, the focus is really on energy independence and security. Ukraine’s stated goal was to move its reliance on renewables up to 25 percent of its energy mix by 2035. Ukraine’s energy mix features fossil fuels heavily, particularly coal and natural gas, followed by nuclear power, which accounted for almost a quarter of the mix in 2018. By 2020, renewable energy rose from 5 percent of the country’s mix in 2018 to 12.4 percent. That’s significant progress, particularly for a country identified as one of the world’s top ten renewables producers in 2019 and one five fastest developing in 2020. As of the end of 2020, solar dominated Ukraine’s renewable energy mix with a 78 percent share, followed by wind at 20 percent, according to some loose PCS research and calculations.
The region in Ukraine where the conflict is centered is also where most of the country’s renewable energy capabilities are located. In fact, 66 percent of Ukraine’s renewables are located in: Odesa, Zaporizhzhia, Mykolaiv, Kherson, and Dniepro. Further, 60 percent of solar power capability is in conflict “hotspots,” amounting to 3,770 MW of installed capacity. Thirty-eight of 42 wind farms are located in the region stretching from Odesa to Luhansk. As a result, the risks of loss in the renewable energy sector have been pronounced, and already, it appears that kinetic activity has led to potential industry-wide insured loss activity.
Review of the risk and damage
According to Kosatka.Media, the damage caused to Ukraine’s solar energy sector by the conflict has been considerable, beyond what PCS has estimated separately both for the renewable energy sector and the broader conflict. The energy news and information site warns of the risk of widespread bankruptcies among renewable energy companies in Ukraine and profound difficulties in relaunching the sector, based on both damage sustained so far and the economics associated with operating during a conflict. For the global re/insurance industry, there is an expectation of significant loss activity.
Commercial solar in and around the Donbas region has sustained damage, with an estimate of 30 to 40 percent of exposed capacity believed to be damaged so far (1,120-1,500 MW of installed capacity). Further, those not damaged have been instructed “to limit production during daylight hours to ensure the viability of the energy system.” The reliability of the estimates is constrained by the lack of access to impacted sites, as a result of ongoing fighting. Kostaka.Media reports that further damage to solar comes from private home installations, which represent around 1.2 GW of capacity, approximately 24 percent of which is estimated to have been damaged.
However, PCS does not believe that this will significantly increase industry-wide insured losses, given that personal lines insurance penetration is believed to be low and only contributing an estimated $100 million to the industry-wide insured loss from the conflict (so far).
PCS does not have an estimated industry-wide insured loss yet for the solar sector in Ukraine. While there is a sense that the potential for physical damage and business interruption insured losses could be high, based on client conversations, any estimates would likely not be proportional to solar’s share of Ukraine’s energy mix relative to PCS’s estimated $800 million in industry-wide insured losses from wind farms. A range of variables could impact a difference in industry-wide insured losses between wind and solar, including the cost of equipment, availability of equipment and qualified talent, and revenues and productivity of each facility.
PCS’s previously published industry-wide insured loss estimate for windfarms remains stable, although it is still very early in the reporting process and claim lifecycle. However, Kosatka.Media offers additional insight into the damage sustained to windfarms in Ukraine. They estimate that two thirds of turbines have been stopped, with 1,162.5 MW of 1,673 MW of installed capacity “not working.” The 372.5 MW that is functioning is mostly located around Odesa and Lviv. Kosatka.Media also notes that turbines belonging to two owners have been destroyed, although there is no further reporting on physical damage to windfarms, differing from what PCS has learned in client conversations related to our PCS Global Large Loss platform.
Insurance after the conflict
The accumulation of insured specialty lines losses provides a unique set of challenges for the global re/insurance industry, particularly if the event exceeds an aggregated $20 billion (inclusive of insured losses related to leased aircraft) – an estimate that could continue to develop as the conflict continues. The discovery of additional categories of insured loss could push that number higher, as well. PCS had not included any estimates for solar, for example, in our previous information-only bulletin on industry-wide insured losses from the conflict in Ukraine. However, the role that insurance plays in post-conflict rehabilitation becomes an important illustration of the need for insurance worldwide.
Insurance contributes to post-event recovery, whether from natural or man-made events. Further, it is a unique form of capital for that purpose, given that it is negotiated in advance – both the amount of protection and the conditions under which capital is to be provided. Other forms of post-event capital, such as foreign aid, have to be negotiated during periods of peak need, may take longer to materialize, and may not be directed predictably by government officials. Take losses to windfarms, for example. The presence of insurance means that a claim payment can be directed to the windfarms, rather than being redirected by other priorities. Broader insurance penetration increases that predictability across a broader base of society.
It’s important to remember that the conflict in Ukraine fits into a broader worldwide political violence trend for the global re/insurance industry, following annual multi-billion-dollar losses back to 2019. Rather than look at the past four years as a series of one-off events, it’s time to take the trend at face value and better understand political violence risks as they relate to the global re/insurance industry and develop more robust approaches to risk transfer.
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