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What are the long-standing consequences of the global energy crisis

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The Big Question: What will be the fallout of the energy crisis for transformation to a greener future?

27.04.23 The Big Question

The global energy crisis will have long-standing consequences as well as its dramatic short-term effects. That’s the topic of conversation with Anthony Vassallo, Global Product Leader – Energy and Head of Energy & Construction, UK and Nordics, at AGCS.

15 April was a seminal date for the European energy market. In marked contrast to its European neighbours, Germany pushed ahead with plans to close its last three nuclear reactors at Baden-Württemberg on the banks of the Neckar River, as well as the Bavarian Isar 2 complex and the Emsland complex, not far from the Dutch border.

Of course, the decision didn’t exactly signal a major shift in policy, given that the country began phasing out nuclear power more than 20 years ago, with plans escalated following Japan’s Fukushima nuclear disaster in 2011. 

However, the decision has been thrown into sharp focus by Russia’s invasion of Ukraine last year- a conflict which is ongoing and which has caused upheaval across Europe’s energy markets, which most commentators would agree had become overly reliant on Russian gas imports.

Let’s put that upheaval in figures. According to the International Energy Agency, in the wake of Russia’s invasion of Ukraine and a surge in energy prices, natural gas demand in the European Union fell in 2022 by 13%, its steepest drop in history. The decline is the equivalent to the amount of gas needed to supply over 40 million homes.

In the short-term, Europe has adjusted by buying more US-supplies of liquified natural gas (LNG), but in the longer term the energy crisis will have profound consequences for the development of the renewables sector, which will see considerable expansion under the EU’s revised energy strategy: by 2030, the 27-country EU would commit to sourcing 42.5% of its energy from renewable sources like wind and solar, with a potential top-up to 45%.

Given this context, in this week’s Big Question we are delighted to speak to Anthony Vassallo, Global Product Leader – Energy and Head of Energy & Construction, UK and Nordics, at AGCS as he addresses what the long-standing consequences of the global energy crisis are and how has this impacted the green transformation.

Ian Summers, Global Business Leader, AdvantageGo

We recently published our annual Allianz Risk Barometer survey in which the energy crisis appeared for the first time,” says Vassallo. “The overreliance of major European economies on cheap Russian gas had been credited with fueling economic growth for years, but Russia’s invasion of Ukraine created economic and political shockwaves that will take years to subside.”

“Coinciding with French nuclear reactor maintenance, droughts in Europe affecting hydropower, and the Nord Stream gas pipelines attack, it is clear why energy costs rocketed in 2022. Supply chains looked fragile. Loss situations that used to be addressed in six to 12 months have taken 50% to 100% longer due to shortages of components and supplies. Replacement costs have increased at rates not seen in decades.”

On the risk side, he adds, as businesses seek an alternative to gas, there are hazards associated with reactivating or upgrading redundancy systems that have been unused for a while, carrying out delayed maintenance, or running plants harder after a couple of ‘slow’ years.

“Nonetheless, we are presented with an opportunity: the acceleration of the energy transition. Legacy energy players and new entrants are driving investment, with spending on the global net-zero transition surpassing $1trn in 2022. The winter of 2022-2023 was mild in Europe, with reduced heating requirements. Liquefied natural gas (LNG) import facilities were built across the continent, there were favorable conditions for wind and hydro power, and French nuclear plants came back online.”

Vassallo notes that energy prices are returning to levels last seen before summer 2022, but are still above long-term averages. And as economic growth materializes, he adds, industrial energy demand will rise, and the switch to renewable energy needs to accelerate, as even with near-full storage facilities Europe could be short if there is a bad winter in 2023-2024.

What trends and developments are you watching in the renewables space?

Insurance has a key role to play in supporting the growth of renewables through both risk transfer and unlocking access to finance, Vassallo says:

“We are seeing opportunities materialize in terms of energy storage, hydrogen, and carbon capture projects. We expect this trend to continue and, indeed, accelerate. A recent example involves the construction of one of the world’s largest renewable energy hubs, to produce, store, and deliver hydrogen in the US.”

“The attention placed on energy security in recent months has raised the profile of energy storage. The demand and supply of energy have to be balanced, and as renewable power sources expand, so, too, will the need for energy storage. The intermittent nature of some renewables such as wind and solar also fuels this need. Future energy-storage systems are likely to be varied and complex, calling for proactive risk management and diversification. We regard optimized energy storage as an essential element of the energy transition.”

He noted that the significant investments in transition technologies and infrastructure, boosted by the energy crisis, will come to fruition much earlier than could have been foreseen:

“We are watching the expansion of green hydrogen closely. It is made using renewable energy so it has great potential to decarbonize high-emitting industries if deployed at commercial scale and we expect production to ramp up significantly in the medium term. Hydrogen is also showing promise as an energy-storage solution if it is converted from intermittent renewable sources. Also promising are battery energy-storage systems using lithium-ion batteries, if fire safety concerns can be overcome.”

What are the emerging risks associated with the energy transition?

Risks vary with the technology deployed, says Vassallo. “The vulnerability of solar PV (photovoltaic) to natural catastrophes is evidenced by recent loss activity. Europe endured a year of unprecedented hailstorms in 2022, with France suffering record insured losses of almost $5bn. These risks could be heightened by climate change.”

“Offshore wind is challenged by the risks of ever-larger turbines, as well as the hazards of natural environments such as the North Sea. Maintenance is complex and can be dangerous. Emerging technologies can bring significant benefits but also new risks, such as floating wind power, which has exposures connected to mooring and cabling.”

“Hydrogen production uses technology our engineers are already familiar with, but presents challenges from the rapid expansion of the market and newcomers within it, as well as risks from leaks and fires. Energy storage using lithium-ion batteries has raised concerns about the dangers of ‘thermal runaway’, a phenomenon that has been implicated in several serious fires in recent years.”

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