Power sector trilemma requires new strategy – WTW

Broker WTW has issued its latest research in the state of the global power industry which warns the sector is still suffering from the enduring “Trilemma of Tension”.

It calls on risk managers to invest in horizon-scanning to assess their own unique risk profile, and to work with partners to enhance their awareness and better inform and guide suitable risk mitigation, management, and transfer strategies.

The report explains the Trilemma, encompassing stress between energy security, affordability, and sustainability, has led to continuing volatility in the power sector. “The uncertainty is amplified by the global polycrisis, including the rising global cost of living, supply-chain disruptions, and geopolitical tensions,” it adds. “With potential recession looming and sustained inflation, the power sector faces the risk of assault on multiple fronts.”.

Graham Knight, WTW’s head of Global Natural Resources, said: “The challenges we reported in 2022 – the Russia-Ukraine conflict, global inflation, energy transition, and climate change – are ever-present. We’ve seen some positive developments, though. Wholesale gas markets have eased, and supply has shifted away from Russia. There’s signs of global inflation easing as economies respond to higher interest rates, and growing momentum behind the energy transition.

“On the other side of the equation,” he continued, “the crisis in the Middle East, precipitated by the Israel – Hamas conflict, combined with the very real potential for a global recession, creates further uncertainty for generators and markets. High levels of natural catastrophes are also driving major losses across the continents, and they’ve showed no sign of returning to lower historical norms. Meanwhile, transmission networks are coming under pressure from a higher reliance on intermittent power, as re-commissioned coal plants are turned off and gas-fired output is deployed to balance the system.

“All of these issues are creating uncharted waters for the power sector, as generators of all types, conventional and renewable, seek to balance competing demands for energy security, affordability, and sustainability. That trilemma is as challenging as ever.”

He added: “This year’s theme, “A smarter way to manage resilience in a volatile world,” underscores the urgency of understanding and managing the complex risks shaping the industry. From geopolitical tensions to inflation, climate change and the energy transition — these challenges are redefining the landscape in which power clients and insurers that serve the sector operate. The ongoing Israel — Hamas conflict has further compounded geopolitical challenges and created some additional uncertainty for power generators and insurance markets.”

“As we embark on this journey through the 2023 Power Market Review, we do so with purpose and dedication. The symbiotic relationship between the power sector and the insurance market underscores their shared interests. Threats to insurers in terms of risk also endanger power sector customers. This alignment necessitates a reconsideration of risk analysis, risk mitigation and risk transfer strategies.”

Knight concluded: “The challenges ahead are formidable, but they present opportunities to build resilience, innovate, and navigate the path ahead. The power sector’s role in shaping a sustainable future is vital, and the insurance industry is a steadfast partner in this endeavour. Together, we ensure resilience remains central to our strategies, empowering power companies to weather change, emerge stronger, and face the challenges of tomorrow.”

The report explains the Trilemma, encompassing stress between energy security, affordability, and sustainability, has led to continuing volatility in the power sector. “The uncertainty is amplified by the global polycrisis, including the rising global cost of living, supply-chain disruptions, and geopolitical tensions,” it adds.

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