U.S. electricity generation through renewable sources of energy has seen significant growth from 2001 to 2011. Now is the time for the insurance industry to grasp the nettle and create products that support the next leap forward in renewable energy.
This growth has helped diversify the country’s power portfolio, bringing the benefits of lower CO2 emissions in electricity generation while increasing employment through the construction and operation of wind and solar plants.
Individual states are encouraging this growth to continue into the future through the use of Renewable Portfolio Standards, even as the federal government dithers on its strategy going forward.
The Renewable Bottle Neck
There is sufficient renewable energy resource in the U.S. to achieve 20%-30% of the electricity generation portfolio. But in order to get close to that level, as some states envisage, there is a bottle neck that must be addressed: transmission lines.
This issue is particularly acute with wind energy, which has made up the bulk of renewable energy growth. Good wind sites near load centers are becoming harder to find and planning approval harder to obtain. Most often, the best sites for large scale wind farms are far from the cities that have the electricity demand.
The National Renewable Energy Laboratory (NREL) has been studying the role of transmission lines to better integrate renewable energy in the U.S. power portfolio.
Let’s take a look at some of the key findings:
- High penetrations of wind generation are feasible with significant expansion of the transmission infrastructure.
- New transmission will be required for future growth and planning for this transmission is imperative because it takes longer to build new transmission capacity than it does to build new wind plants.
- Greater transmission capacity reduces the impacts of the variability of the wind, thereby increasing the reliability of the electrical grid.
Transmission Projects in the U.S.
Increased transmission capacity is clearly needed to match renewable energy supply with demand. There are several transmission line projects in various stages of planning throughout the U.S.
At the forefront of this development are renewable energy companies looking to ensure there is a market for the clean energy they produce. These private companies are investing in the construction of transmission lines, and then selling the asset to utility grid operators.
When non-utility developers build transmission lines the methods of managing risk must be re-evaluated. Insurers have long been wary of covering transmission & distribution (T&D) lines and reinsurance treaties regularly exclude them, as my colleague David Reynolds elaborated on in his earlier blog post.
The structure of large utilities allows them to absorb the property damage risk associated with T&D lines, through CAT bonds or self-insuring. It is likely that these methods will be used by the utility owner once the transmission line becomes operational. Where the insurance market is most needed is in the construction phase, where limited liability companies (LLCs) utilizing non-recourse financing require an insurance solution to transfer the risk.
The insurance market was originally circumspect about utility scale renewable energy and the property damage risks it presented.
With time came understanding; and today the insurance market for renewable energy is robust. It is time now for insurers to take a second look at transmission lines for renewable energy. It is time to challenge the conventional wisdom and create a product that meets the needs of the industry to support the next leap forward in the U.S.’s renewable future.