AXA XL | Energy transition in Asia: How AXA XL helps enable the region’s ambitious plans
May 31 2024
With an abundance of data and our own experiences, it’s clear that humanity is at a critical juncture. The transition to sustainable, low-carbon energy sources is no longer a choice but an urgent necessity.
As my colleague Vicky Robert-Mills wrote in a previous Fast Fast Forward article, the scale and complexity of the energy transition are immense, as are the risks. That is why, as Vicky put it, “Insurance has a fundamental role to play in (the energy transition).” This includes providing credit and political risk insurance, which are increasingly critical prerequisites for investors in renewable energy.
A transformative shift
According to the International Renewable Energy Agency (IRENA), about $130 trillion will be invested worldwide by 2050 to support the transition from traditional fossil fuels to cleaner, more sustainable sources, including wind, solar, hydropower, and geothermal energy. The impacts will be transformative. While some will lead and others will follow, every corner of society—governments, businesses, non-profit organisations, academia, and individual citizens—will be affected.
However, transitioning to low-carbon sources is about more than just substituting one type of energy for another. It will require fundamentally restructuring the entire energy ecosystem, including upgrading infrastructure, integrating renewable energy into existing grids, and developing new ways to store energy from intermittent sources like solar and wind.
Legacy energy companies, which have powered (pun intended) a growing global economy, will be on the front lines of this transformation. Although most are committed to developing more sustainable energy mixes, their deep roots in fossil fuels will make it difficult to pivot quickly. Also, producing energy from renewable sources requires different capabilities and expertise.
In Asia, economic and social factors add further layers of complexity. In particular, several Asian countries derive considerable revenue from fossil fuels and have invested in this sector for decades, including in projects that came online recently and are planned to be operational for at least the next 30 years.
Other challenges include inadequate grid infrastructure, bureaucratic red tape and regulatory barriers. For example, AXA XL supported a renewable energy project where construction delays for a new transmission line connecting the facility to the national grid meant the project owner couldn’t sell the power until the evacuation lines were completed.
Ambitious plans
While the challenges are formidable, transitioning to renewable energy will drive economic growth across the region and create millions of new manufacturing, construction, and maintenance jobs. IRENA also estimates that over 11 million new jobs could be produced in Asia’s renewable energy sector by 2050.
It starts with abundant renewable resources. India and China have vast solar potential and ambitious plans to significantly increase the share of non-fossil fuels in their energy mixes. India, for example, aims to install 450 gigawatts (GW) from renewable sources by 2030.
China’s plans are even more ambitious. It accounted for 59% of the new renewable energy capacity added in 2023, including 216GW of new solar photovoltaic capacity—more than many other developed countries currently have installed. China’s targets call for installing 1,200GW from renewable sources by 2030, but given its current pace of expansion, it could potentially exceed this target by up to 300MW.
Japan is investing in offshore wind farms, solar power, and hydrogen technology and estimates that renewables will account for 22-24% of its electricity mix by 2030. Likewise, South Korea has committed to phasing out outdated coal-fired power plants and increasing its reliance on renewable energy as part of its Green New Deal initiative. Its investments also focus on offshore wind, hydrogen fuel cells, and solar power.
Vietnam is emerging as a renewable energy leader in Southeast Asia, with substantial wind and solar power investments. The country is on track to produce 30% of its electricity from renewables by 2030. Vietnam also offers renewable energy development incentives and has begun attracting foreign investment in clean energy projects.
Credit and political risk insurance: Critical enablers
AXA XL’s Asia-based teams have been supporting renewable energy projects since 2014 and are deeply familiar with diverse initiatives that cost hundreds of millions, if not billions, incorporate relatively new technologies, and are located in places with high natural catastrophe exposures, some of which are also subject to political instability. Moreover, these projects are typically owned by special-purpose vehicles with few other assets. In other words, investors need to be comfortable participating in ventures where the risk exposures are high, the risk horizons are long, and the borrower has limited collateral.
Given these factors, credit insurance is becoming a vital enabler for renewable energy investors. It offers two essential benefits.
The first is protection against the risk of non-payment by borrowers. A facility that isn’t generating electricity isn’t producing revenue for its owners and investors, and there are numerous ways in which construction can be delayed or a facility taken offline after it becomes operational. For instance, supply chain disruptions and weather delays can impede construction. Once operational, accidents, mechanical failures, severe storms or, in the case of offshore wind farms, damages to subsea cables can take a facility offline for months.
Second, partnering with a credit insurance provider who assumes a portion of the risk allows institutional investors, financial institutions or other “holders of capital” to expand their internal limits and risk tolerances. That, in turn, lets them offer beneficiaries funding that otherwise wouldn’t have been available or a financial package greater than the lender could have delivered on its own.
In some cases, owners or investors might also take out political risk insurance to mitigate country risk, including currency inconvertibility, exchange transfer, breach of contract by the host government, and losses from civil strife, expropriation or related disruptions. Since renewable energy projects are typically long-term undertakings extending well beyond election cycles, political risk insurance is particularly relevant in emerging markets as an effective hedge against future political and economic uncertainty.
Supporting the energy transition with blended finance solutions
In recent years, credit insurance has also become an integral component in blended finance structures where different institutions and entities join to finance a development project. The stakeholders can include government agencies, multilateral development finance institutions (DFIs) like the Asian Development Bank (ADB) or the Asian Infrastructure Investment Bank (AIIB), non-governmental organisations, commercial banks, institutional investors, and, lately, philanthropic organisations.
The potential benefits of such blended finance solutions are considerable. For starters, a collection of investors has more capacity than any single investor. Moreover, these varied entities have different capabilities, and blended finance structures can leverage each other’s strengths to achieve common goals. For instance, public sector agencies can provide policy support, regulatory frameworks, and public infrastructure, while private sector investors bring capital, expertise, and efficiency to project implementation. Blended finance structures can also lower the cost of capital by combining concessional financing from government agencies or DFIs with commercial funding from private investors. This helps make inherently risky projects more financially viable by bridging the gap between the relatively high cost of capital for renewable energy projects and the lower returns expected by private investors.
Since 2014, AXA XL’s Asia-based Political Risk, Credit & Bond (PRCB) team has supported almost two hundred “green business” projects, primarily for renewable energy. (Others included marine conservation, low-carbon vehicles and water resources.) Although the journey has been challenging at times, our green business portfolio has more than doubled since 2019. We have also assembled a strong, capable team of underwriters and risk analysts to support these projects and established excellent working relationships with government agencies and major commercial banks.
The energy transition represents a monumental undertaking that will reshape the global energy landscape and economy. To overcome the scale and complexity of the challenges, unprecedented collaboration and innovation across all parts of society will be required. At the same time, the transition offers immense opportunities to create more sustainable and resilient energy systems for future generations. AXA XL looks forward to supporting clients in navigating the challenges and unlocking the opportunities.
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Mark Houghton
Head of Political Risk, Credit and Bond, APAC, AXA XL Email: [email protected] |