Re-powering the energy market

The energy market is undergoing a massive transformation. Decarbonization requires efforts by policymakers and the business community to achieve the goals of cutting greenhouse gas emissions to net zero while ensuring secure energy supplies.
The production, transport and use of energy play a key role in society, with wide ranging impacts. Changes in the global energy mix in regards to one or several fuel types, e.g. the transition from water power and wood to coal in the 19th century, or from coal to oil and gas in the 20th, have always triggered broader social and economic shifts. The current challenge for the energy market is to manage a new transition, towards more efficient and low-carbon energy systems.

In 2015 the United Nations approved the Agenda 2030, also known as the Sustainable Development Goals, which were created to combat global challenges including climate change. Moreover, during the same year, the Paris climate agreement successfully demonstrated the constructive spirit of multilateral cooperation on climate change and has put pressure on business to cut greenhouse gas emissions.

Investors are increasingly taking climate change considerations into account in their investment decisions. In December 2017, as part of the Climate Action 100+ initiative more than 200 institutional investors committed to increase pressure on the world's 100 biggest corporate greenhouse gas emitters to combat global warming.

Public and non-governmental organizations are calling on companies to improve disclosure of greenhouse gas emissions, including those from the use of their products, and to step up governance of climate risks and opportunities.

Ongoing change is not necessarily a substitution of one particular energy source by another. It is, rather, a door opener for a variety of technologies, innovative solutions and new business models. Today, fossil fuels are still the dominating source of energy generation. Lignite is a major contributor to CO2 emissions and the associated climate effects.

According to the International Energy Agency (IEA), coal accounts for 28.1% of the world total energy supply. The share of coal is even higher in terms of electricity production at 39.3%.

The share of coal in the global energy mix is shrinking. Coal is increasingly substituted by natural gas, which generates less CO2 in relative terms and is also affordable for electricity generation.

In comparison to coal, oil has a specific function in the energy market because it does not normally compete within the electric generation market. Oil mostly powers the transportation sector (e.g., cars, planes, ships), while coal, gas, nuclear and renewables are used for electricity generation. Thus, the oil industry is influenced more by the pace at which changes occur in the transport sector.

When it comes to renewables, hydro and wind are the types most deployed for electricity generation. Generally, the renewables sector is dominated by large generation units owned by investors or utility companies. Nevertheless, there are markets where small-scale generation dominates. Asian and African countries (e.g. Bangladesh, Nepal, India, Kenya and Uganda) are the biggest markets for home solar systems.

Renewables have a high growth potential. According to the International Renewable Energy Agency, solar power generation could reach a capacity between 1 600 GW and 2 000 GW by 2030 from 230 GW in 2015, while wind power can grow more than quadruple from 400 GW in 2015 to over 1 800 GW.

By the end of 2016, the capacity of renewable energy sources was enough to provide an estimated 24.5% of global electricity, including hydropower supplying about 16.6%.

In 2017, solar and wind showed the largest growth in the power sector in all regions, mainly driven by falling costs. In 2018 solar photovoltaic modules are more than 80% cheaper than in 2009.

Much of the initial impetus for the development of renewable energy has been derived from its potential for reduced environmental impacts, namely CO2 and other harmful emissions, rather than a pure financial incentive. In many locations, the renewables sector still relies on  regulatory and financial support from governments and the international community. However, falling costs are increasingly providing the business case for renewable energy.

According to Bloomberg New Energy Finance, global new investments in clean energy reached $333.5 billion in 2017. This represented a rise of 3% from a revised $324.6 billion in 2016, and is only 7% shorter than the record figure of $360.3 billion, reached in 2015. Investment in the renewables sector has exceeded USD 200 billion per year for the past seven years.

In 2015, for the first time, total investment in renewable power and fuels in developing economies exceeded that in developed countries, mainly due to  development in China, India and Brazil. Utility companies continue to be the main equity provider for the renewable energy market.

Climate change is placed high on the Allianz Corporate Responsibility Strategy. Allianz as an insurer and investor focuses on mitigation of the risks arising from climate change and promoting the low-carbon economy. Allianz Climate Change Strategy lies at the heart of the business model that aims to protect people and businesses from risk.

In May 2018 the Allianz Group has announced commitments to actively support the global change to a low-carbon economy over the coming decades.

In Property and Casualty insurance Allianz will no longer provide insurance to single coal-fired power plants or coal mines.

Companies that generate electricity from multiple sources, such as coal, other fossil fuels or renewable energies, will continue to be insured. By 2040, however, Allianz’ stated goal is to completely phase out coal risks in its insurance business.

AGCS aims at becoming one of the leading insurers of renewable energy projects in order to support the energy market transition. AGCS is successfully active in the renewable energy market and aims at enlarging its stake. The renewable energy sector opens a number of opportunities for AGCS to establish better collaboration with our clients as well as develop and offer new products and solutions for complex risks.

We are dedicated to deliver the best possible solutions to the management, control and reduction of ESG risks. If you are interested to learn more, do not hesitate to get in touch: AGCSSustainability@allianz.com

RESOURCES AND LINKS

Allianz Sustainability report 2017

Bloomberg New Energy Finance, The Clean Energy Investment Trends report. 2018

International Energy Agency, World Energy Outlook 2016 & 2017

International Renewable Energy Agency, Roadmap For A Renewable Energy Future. 2016

International Renewable Energy Agency, Renewable Power Generation Costs in 2017. 2018

Renewables 2017 Global Status Report - REN21. 2017
Alina Morozova
alina.morozova@allianz.com
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