Power Newsletter

Aon Risk Solutions
Power
Power Newsletter
Message from the Global Power Chairman
In this Issue
1
essage from the
M
Global Power Chairman
2
Power market update
4
A political perspective on flagging energy prices – interview with Miguel Mesquita da Cunha
5
Ash pond liability case study
5
Political risks update
6
Drones: friend or foe?
6
Strengthening Aon’s
proposition
7
Aon strengthens the U.S.
Power Practice with the
hire of Derek Whipple
8
Key Contacts
In the Q4 2014 edition of our newsletter, I argued that ‘the bear has
now truly awoken’ and that our ursine friend would propel our
industry towards exciting and challenging times. In the light of
OPEC’s decision not to cut crude oil production and the downward
slide in global energy prices, it seems my prediction was remarkably
prescient. In dramatic fashion, the changing energy environment has
helped to spark a sharp increase in competition within the power
market worldwide, with considerable implications for our industry.
As such we are keen to provide our readers with a view regarding the broad geopolitical
implications of this energy evolution, with insights this time provided by Miguel Mesquita
da Cunha, an expert in European policy and geopolitical affairs.
We also explore how these new trends are already manifesting themselves in the power
market, with our very own Rob Hale providing a brief overview of our Aon Power Market
Review 2015. The full, unabridged version will be distributed to our readers in the coming
weeks.
As a watchdog in the power industry, Aon Global Power is always concerned about
emerging risks and the potential for a resultant market response. In this edition we have
elected to address two new, but unconnected, topical issues that are presenting real risk
management challenges for the industry: ash pond liability and drones.
Together with Aon’s Political Risk team, we also address findings from this year’s Political Risk
Map review. With geopolitical instability in numerous geographies, the team provide us
with their thoughts on the implications of uncertainties and security threats on the power
and utilities sector worldwide. The team shines a welcome light on this often overlooked risk
for the power sector.
Finally, I am glad to be able to introduce Sam Beaver and Charles Lindley, who join our
London Power team, and Derek Whipple who will reinforce our U.S. Power Operations
on the West Coast.
Please do not hesitate to contact the team or myself regarding any of the content in this
edition or on any other matter.
I hope you enjoy our insights.
Denis Waerseggers
Risk. Reinsurance. Human Resources.
Q1 2015
Power market update
The Power industry is undergoing significant transition and evolution. A combination of dynamic
factors are helping to drive change in the sector, from political instability and the search for energy
security, through to technological evolution and environmental concerns. All of this against a backdrop
of recovery from the economic crisis, continuing growth in demand among emerging markets and the
increasing power of the ultimate consumer. When navigating these conditions it’s important to stay on
top of the risks and opportunities that all this presents.
Economic backdrop
Despite promising signs of global economic
recovery following the financial crisis, the
growth of many economic regions slowed into
the middle of 2014. There was significant
weakness in Europe as the German and French
economies both contracted in the second
quarter, with Germany bouncing back in the
fourth quarter, while Japan unexpectedly went
into recession. More positively, the U.S. and
U.K. economies performed strongly, with
growth of GDP of around 2.5% for the year.
Fortunately, like the latter economies, the
power market is showing optimistic signs as
companies look at new project developments
and M&A activity starts to increase again. For
instance, as growth in mature markets slows,
power companies are looking into new
technologies and geographies when
evaluating their investment strategies.
Nevertheless, the industry is different from
pre-crisis days and as a consequence, power
and utility companies are moving away from
billion-dollar-plus deals as operators focus on
middle market deals and core business
investment. Many operators expect the
existing power utility model in their market
to transform or even become unrecognisable
between now and 2030. A few of the main
driving factors are:
1. Emerging technologies
2. Decentralised generation
3. Competition among fuels
4. Drive for increased energy efficiency
5. Political uncertainty
1. Emerging technologies
2. Decentralised generation
As costs of emerging technologies reduce,
financial barriers can be overcome which
will set the scene for global industry
transformation. Taking the renewable energy
industry as an example, there was more than
USD 270 billion invested in 2014, according to
Bloomberg, up 16% on 2013 in spite of falling
oil prices and technology costs. Innovation
also continues in more traditional power
generation—today’s new thermal technologies
for example utilise super alloys and ever finer
tolerances, contributing to higher efficiencies
and improved performance. Critically, current
gas turbine advances are not just evolutionary
like in the late 1990’s with the E to F class;
we now see entirely new designs involving
aspects like new blade dynamics, spurred by
commercial incentives to breach the +60%
efficiency milestone. In deploying such
technologies it is important that the risks are
fully understood and that effective insurance
cover is implemented in support of warranties
and mitigation practices.
A recent paper produced for Edison Electric
Institute commented on the impact of
distributed energy sources (DER): “as the cost
curve for these technologies improves, they
could directly threaten the centralised utility
model”. In truth, decentralised generation is
already eating into revenues and marginalising
conventional generation. Business interruption
figures will begin to become more volatile
as grid dynamics change, meaning that the
insurance market will eventually need to adapt
to the new complexity heralded by the likes of
smart grids.
Global Power Newsletter | Q1 2015
Rob Hale
Head of Global Power Broking
[email protected]
+44 (0)20 7086 0215
3. Competition
among fuels
Competition among fuels for power
generation, such as with shale gas in
North America, is drastically effecting
a plant’s position on the merit order,
causing considerable issues for
operators. For instance, in the U.S.,
cycling and peaking gas turbine plants
are now expected to run base loads;
while U.S. coal - no longer required in
the same quantity - is being shipped
to Europe. It is therefore a necessity
for existing infrastructure to adapt to a
transforming fuel market. Retrofitting
components is often the solution, as is
deploying new innovative technology
features and moving into new markets.
As a consequence, a plant’s original
logic and procedures must change,
which can help to foster design
innovations that only materialise when
emergency systems are required.
2014 has been an especially troubled
year for expensive fire claims, and
if retrofitting continues to be a
requirement, this peril may become
more frequent. This is against a
backdrop of falling oil prices, ensuring
that developers and operators have
important decisions to make on their
future business mix.
2
4. Drive for increased energy efficiency
5. Political uncertainty
In pursuit of reducing carbon footprints and energy bills, there is an increasing drive to energy
efficiency. This represents both an opportunity and a threat to the power sector as companies respond
to the demands of their customer base and capitalise on the operational efficiencies that can be
achieved. In one respect, customers are becoming active energy savers. The concept of a resourceful
planet — the idea of optimising our use of limited resources and
promoting renewable energy and lower carbon energy resources
— is considered by many utilities as liable to have a major impact
on their core business over the coming 12 months. Fortunately,
it has been found that a reduction in generation does not
necessarily equate to a reduction in profit. Programs to reduce
energy consumption can be cost-effective, and can yield
aggregate benefits for utilities (who enjoy lower operating costs)
and consumers (who enjoy lower bills).
Asset performance in particular is an area considered to have
significant potential for improvement and savings.
Growing services offered to customers in distributed generation
is at the forefront of many utility’s strategies to ensure that they
are well placed for it to become an opportunity rather than a threat.
In this way utilities aim to become energy partners, rather than
just energy suppliers.
Against a backdrop of geopolitical
risks and uncertainty this is proving a
challenging area for power companies
operating in and expanding into
emerging territories. In the E.U. we
are seeing potential issues at the
borders with Ukraine and Russia while
issues in areas of the Middle East
continue to impact risk considerations
and the business model of power
companies.
Emerging markets continue to be
attractive for businesses seeking
alternative areas for growth. However,
in less mature economies, assets,
contracts and loans can be adversely
affected by government actions.
As such, effective risk management
practices need to be deployed for
added investment security.
Insurance market reflections
The insurance market operates on a fairly simple supply and demand
basis with insurer capacity and premium rates inversely correlated.
The period 2008 to 2013 was marked by a cluster of expensive
natural catastrophe and power-specific losses that challenged
carriers to push for higher rates. In 2014, a relatively benign
catastrophe season, which helped to deliver a profitable
(if marginal) year for many underwriters, combined with an
abundance of capacity, has generated increased competition
for profitable business.
be at an all-time high, with levels at more than USD 3.5 billion, up
from USD 2.9 billion in 2008. In addition to existing insurers trying
to increase their capacity on business, there are also new players
coming into the market, such as Berkshire Hathaway and Allied
World, supplemented by increased capacity from carriers such as
AEGIS and AIG. With increased capacity and relatively benign natural
catastrophe activity, general insurance prices in the sector are likely
to reduce further depending on geography, technologies deployed
and claims experience.
In the last five years the power insurance market has paid more than
USD 16 billion in claims. In 2014, a relatively benign year for natural
catastrophe activity, the insurance industry still experienced more
than USD 1.5 billion in operational power claims with more than
60% coming from machinery breakdown, highlighting how critical it
is to understand loss trends with technologies and risk engineering
practices.
As the nature of the power industry evolves, it is clearly a testing, yet
exciting, time to be part of the sector. The insurance industry needs
to respond to the trends being seen and respond to changing
demands. While traditional property and casualty lines of business
dominate the insurance sector, there is a need for products to adapt
to new risks such as cyber, political risk and performance products.
Aon recognises that the landscape is changing and is developing
solutions across the sector to help to facilitate the transfer of new
and evolving risks.
Risk quality, substantiated by detailed and up-to-date engineering
remains a clear focus for underwriters. Despite this, there is a
continued lack of alternative markets with technical engineering
resources to provide market leadership. This has been exacerbated
by XL withdrawing from insuring international power business
outside of the U.S. at the end of 2014.
Despite challenging results in the power sector in the last decade,
the insurance sector as a whole has consistently delivered positive
returns and over the past three years, the power sector has similarly
produced positive results. This has resulted in increased investment
capital for the insurance and reinsurance markets and a push for
insurers to deliver increased budgets across the board. As a result of
this interest, global capacity for power business is now estimated to
Global Power Newsletter | Q1 2015
3
A political perspective on flagging
energy prices – interview with
Miguel Mesquita da Cunha
The geopolitical implications of a new oil environment
Aon’s power team spoke with Miguel Mesquita de Cunha, a consultant
at Gerson Lehrman Group and previously a policy advisor to two
successive European Commission Presidents and the NATO Secretariat
General, about the implications of a low oil price environment.
As Miguel explained “any sudden and sustained shift in so consequential
an economic issue as the supply and demand balance of energy, is
bound to result in considerable upheaval, with economic, political and
security implications worldwide.”
What impact are low energy prices having on developed
economies?
The impact of lower energy prices upon developed economies is hardly
positive. While households can raise their consumption, and energyintensive industries benefit from lower production costs; low energy
prices are curtailing the fiscal income of exchequers at a time when
public deficits and debt continue to mount in most OECD countries.
From a strictly monetary perspective, low energy prices dampen
inflation, at a time when outright deflation threatens; this leads to less
tight monetary policy, with the attendant risk of dangerous asset price
bubbles ahead.
Even more dangerously, acutely-needed investment, both in new
energy production, transport and distribution capacity and in energyefficient products and processes appears less pressing and less
immediately profitable. As such, many projects that by their nature will
take a time to reach completion are being shelved.
What are the implications for non-energy producing countries in
the developing world?
For these countries the effects of lower energy prices are arguably more
positive. Pressure to invest in more efficient products and processes are
diminished, while the imperative for many middle and lower income
countries to invest in infrastructure projects is made easier by lower
prices for heavy and capital goods.
Lower energy prices also afford a golden opportunity for governments
to decisively prune the maze of subsidies around energy that create
acute distortions for many developing countries, even if few countries
seem likely to seize the opportunity.
Finally, by freeing up household and public funds, lower energy prices
should permit a re-orientation of expenditure towards higher
investment in infrastructure, education and health, which should in due
course generate economic growth and improve living standards.
What about the impact on energy-producing states?
Decreased economic output, exports and—crucially—fiscal revenues, are
affecting the stability of oil-producing countries, many of which are much
more socially and politically brittle than their energy wealth would suggest.
Their diversity notwithstanding, energy producers in Latin America,
Sub-Saharan Africa and the Middle East are facing severe budgetary
Global Power Newsletter | Q1 2015
Miguel Mesquita da Cunha
Consultant at Gerson
Lehrman Group
Former diplomat and
specialist in EU policy and
regulatory trends..
strains at a time when growing populations (mostly young and
increasingly urbanised) are demanding better social services and
require sustained levels of investment.
The most severely and immediately affected countries are not
necessarily those whose economy is most dependent on oil production
and exports, nor those where the social situation is objectively worse,
but rather those where weak governance or a lack of perceived
legitimacy of the ruling elite may lead to political unrest.
Are specific industries disproportionality affected by the low oil
price environment?
Certain industries are disproportionately affected by falling oil prices,
but it is apparent that its implications for business are far more
significant than immediately meets the eye.
Producers and distributors of energy are of course most directly
impacted, as are those industries that provide them with equipment or
services. Beyond that however, a much wider array of sectors, whose
products are predicated upon their energy performance, are also being
affected.
In many high-tech industries the comparative advantage of highly
advanced companies, whose products are the most energy-efficient, is
being eroded in favour of their less-sophisticated (and often less-costly)
competitors. Similar shifts are under way in more mundane, but energyintensive, industries, such as construction and many maintenancerelated activities. Low oil prices are creating not just intra-industry, but
indeed international, shifts in comparative advantage.
What is the most worrying development associated with
a lower oil price?
The most worrying consequence of the current situation is that it has
global implications. Apart from the ever-present risk posed by nuclear
weapons, the single gravest threat to civilisation is climate change.
Even assuming that appropriate policy decisions are adopted and
enforced, it would still be essential that energy prices increase, steadily
and strongly, for economic incentives to bolster associated legal moves.
An appeal to morality to influence behaviour alone will not lead the
world to prevent the impending threat posed by climate change; acute
market pressure is indispensable.
Fortunately, lower investment in production, higher demand driven by
lower prices, a likely global economic recovery, demographic growth
and widespread geopolitical instability suggest a return to higher oil
prices will be the most likely scenario.
Black Silver
In times of uncertainty it is important that communication and knowledge
sharing is effective in order to inform key decisions. In support of this Aon
has published a new white paper entitled Black Silver, which examines the
implications of falling oil prices for various sectors, including power. The
paper is available to download at: aon.com/unitedkingdom/productsand-services/industry-expertise/black-silver-whitepaper.jsp
4
Ash pond liability case study
In 2008 the TVA Kingston coal fly ash slurry
spill was estimated to have resulted in
clean-up costs in excess of USD 1 billion.
While incidents of this magnitude are rare,
the Dan River incident in 2014, an 80 mile
ash spillage, has once again highlighted the
impact that incidents like this can have on
the environment. Such incidents have led to
some insurance coverage disputes and
understandably some power companies
have become concerned about potential
exposures to similar events and associated
regulatory implications.
In light of incidents in the industry, U.S.
utility Ameren Corp requested that Aon
explore environmental liability cover
availability for their ash ponds and landfills.
One of the main concerns identified was
that sudden and accidental pollution
coverage offered under excess liability
programmes were understood to exclude
coverage for this exposure. In response to
these concerns, Aon approached several
environmental liability insurers, but carriers
were initially reluctant to cover such
exposures.
damage, and offsite clean-up costs due to
release from an ash pond.
Cross industry engagement is often
required to find solutions to complex issues.
To help address underwriter concerns, Aon
and Ameren Corp invited underwriters and
their risk engineers to meet with them and
tour their ash ponds and landfills in order to
gain further insight into the risks and
controls on mechanisms such as dam safety
for the ponds, inspection programmes and
ash transportation and storage protocols.
Mark Blair, director of risk management for
Ameren Corp commented: “Ameren was
pleased to secure liability coverage for our
ash pond and landfill exposure. This
coverage provides a sense of financial
security for the company and helped to
alleviate concerns regarding this exposure
to the company”.
Insurers greatly benefited from gaining
deeper insight into the exposures and
controls and the approach with Ameren
Corp has helped to build a partnership
approach to risk mitigation for this
exposure. Underwriters that were originally
reluctant to provide coverage have since
offered their support and Aon has
constructed a programme providing in
excess of USD 150 million of capacity with
terms for a multi-year programme covering
third party bodily injury and property
David Nichols
Senior Account Executive, US
Central Region
[email protected]
+13147195145
Political risks update
In March Aon released its new 2015
Political Risk Map, which paints a global
view of developments in political risk. The
analysis presents assessments on aspects
that top the list of risks currently facing
global investors including the fall in oil
prices and the associated instability in oil
exporting countries such as Iran, Iraq,
Libya, Russia and Venezuela. The map also
takes account of political crises such as
those in Libya and Ukraine that are
destabilising oil importing countries which
would otherwise stand to benefit from
cheaper oil prices.
Against the stormy background of 2014,
there are grounds for cautious optimism in
some parts of the world, particularly in
Latin America; the 2015 map sees a
reduced risk rating for Panama, Ecuador
and the Dominican Republic, as well as the
Philippines, Zimbabwe, Swaziland, Georgia
and Laos.
Global Power Newsletter | Q1 2015
In 2015, project cancellation or
expropriation is likely to top the list of
concerns facing power companies doing
business in emerging markets. The strength
of the U.S. dollar - a result of strong growth
in the U.S. and low oil prices – will lead to
many key emerging markets being drained
of foreign currency, at a time when many
state-owned off-takers will be looking to
renegotiate feed-in tariffs as a result of
falling energy prices. As a result, contract
cancellation and non-payment will also
become more likely.
There is also a growing risk of
nationalisation, particularly in the
Commonwealth of Independent States,
but even in southern Europe, as a result
of economic and environmental populism;
a symptom of the long political hangover
from the financial crisis. Ironically, this
comes at a time when this kind of risk is
declining in Latin America, the region
traditionally associated with
nationalisations.
Aon’s political risk team is experienced in
arranging cover for power project operators
and contractors, including for nonpayment, confiscation, political violence
and non-honouring of arbitration awards.
Aon’s map is part of a range of analytical
tools which help clients to establish and
monitor their exposure to political risk, and
take proactive steps toward managing its
impact on their balance sheets.
Aon’s 2015 Political Risk Map can be found
at: aon.com/2015politicalriskmap
Charles Keville
Technical Director, Political
Risks and Crisis Management
[email protected]
+442070863098
5
Drones: friend or foe?
Power stations have traditionally faced a
clearly defined set of security threats, but
the increasing frequency of drones—and the
worrying number of overflights
experienced by European power stations in
recent months—suggests that they face a
potential new attack vector—one that
traditional physical security measures are illequipped to contend with.
While much has been spoken about the
need to protect power stations from attack,
it is apparent that power stations will
struggle to repel potential drone attacks
unless defences are put in place. This is
particularly worrying in the case of nuclear
power plants, which are likely to top the list
of power targets among terrorist groups.
The threat, while remote, is a real one.
Following overflights of 13 French nuclear
power stations last year, the French General
Secretary for Defence indicated that the
government will provide EUR 1 million of
funding for “research projects into the
detection, identification and neutralisation
of small aerial drones”. Other governments
are exploring the potential implications of
overflights.
It is apparent that the threat is being taken
seriously and against the backdrop of
Fukushima, power companies need to
consider closely the potential for both
Global Power Newsletter | Q1 2015
property and casualty exposures should the
unthinkable occur. It is recommended that
plant operators ensure that considerations
regarding the identification of threats and
responses to any incidents are considered as
part of risk management plans.
threat posed by drones. Insurers are
reviewing their responses to such emerging
risks and Aon will continue to work with the
industry to ensure that both the risks and
benefits of drone usage are evaluated
appropriately.
More positive applications
Companies are now also considering the
potential of drones to help power
companies better understand their
operations and respond to future incidents.
In the case of solar arrays they could be
used to pick up underperforming cells using
thermal imaging, could be used to inspect
cracks in wind turbines, or investigate
downed power lines and substations
following a natural disaster or accident.
Mark Fishbaugh, National US
Power Practice Leader
[email protected]
+17043438648
Many in the industry have expressed an
interest in exploring drones’ capacity to
investigate and respond to both operational
and post-disaster needs. Power companies
are looking to explore their potential as a
means to strengthen their operations and
they are even being considered for security,
particularly in the face of an aerial threat.
What seems apparent is that drones will,
with time, have increasing implications for
the power sector, with the hope that
positive applications will outweigh any
Christine Palomba, US Power
Senior Vice President
[email protected]
+14015536638
6
Strengthening Aon’s proposition
London team grows with operational power appointments
The Power team within the Global Broking
Centre in London has welcomed new
additions Sam Beaver and Charles Lindley.
Sam joins Aon as Senior Operational Power
Broker. He has been working in the London
energy market since 2007 having been a
partner within Arthur J. Gallagher’s energy
division, Alesco Risk Management Services,
before Aon.
Sam specialises in new business production,
insurance programme design and market
placement for operational power
generation assets worldwide.
power utility world in the U.S., Asia-Pacific,
the Middle East, Southern Africa and
Europe. His experience will prove
invaluable in ensuring that effective risk
management solutions are implemented
that cover the diverse needs of our clients.
Rob Hale comments “The power and utility
space within the global insurance market is
constantly changing and the addition of
Sam and Charles to our team will increase
our bench strength to help Aon clients to
stay at the forefront of developments and
pursue the best risk transfer solutions for
their individual exposures”.
Joining Sam is Charles Lindley comes to us
from Marsh where he worked for 29 years
and was most recently Senior Vice President
for power and utilities in London. Charles
has extensive experience of the operational
Sam Beaver
Senior Operational
Power Broker
[email protected]
+44 (0)20 7086 2049
Charles Lindley
Broking Director /
Client Director
[email protected]
+44 (0)20 7086 3457
Aon strengthens the U.S. Power Practice
with the hire of Derek Whipple
Derek Whipple joins Aon as managing
director and West region leader for the U.S.
power practice.
Whipple has nearly 21 years of experience in
renewable energy, alternative fuels and the
heavy chemical industries. In this new
position, Whipple is responsible for
expanding Aon’s presence in the power
industry by developing new opportunities
and delivering value to clients.
“The power industry demands a risk partner
with specialized, intimate knowledge of the
challenges and opportunities inherit within
that industry sector,” said Tom Fitzgerald,
CEO of U.S. retail operations. “Over the past
year we have made a significant investment
to strengthen our power practice, bringing
in top talent and expanding our capabilities
to ensure we are delivering distinctive value
to this important client group.”
Whipple came to Aon after serving nearly 11
years with Marsh, where he was a senior vice
president committed to large power and
Global Power Newsletter | Q1 2015
utility clients. He has focused on power
throughout his career, specialising in all
types of power generation including gas,
hydro, geothermal and renewable energy.
“We are thrilled to have an industry veteran
like Derek join our team,” said Kevin White,
CEO of Aon Risk Solutions’ construction
services group. “He has built a tremendous
reputation as a leading risk advisor within the
industry and immediately establishes
industry leading capabilities for our team in
the West region.”
“The power industry continues to grow and
expand in the West, and it is important we
continue to invest to meet client needs in the
region,” said Phil Luecht, West region leader
for Aon Risk Solutions. ”We are confident that
Derek will continue to expand Aon’s
presence in the industry sector and drive
results that empower our clients.”
Derek Whipple
Managing Director and
West Region Leader
[email protected]
+14154867354
7
Key Contacts
Denis Waerseggers
Chairman, Global Power
[email protected]
+32 (0)2 730 95 75
Mark Potter
Strategy Development Leader,
Global Power
[email protected]
+44 (0)20 7086 7016
About Aon
Aon plc (NYSE:AON) is a leading global provider of risk management, insurance and reinsurance brokerage, and human
resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to
empower results for clients in over 120 countries via innovative and effective risk and people solutions and through
industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker,
best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits
consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited
to learn about Aon’s global partnership with Manchester United.
© Aon plc 2015. All rights reserved.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
Aon UK Limited is authorised and regulated by the Financial Conduct Authority.
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