7 Critical Risks in Renewable Energy

Tariffs, opposition from the fossil fuel industry and the vulnerability of supply chains for rare earth elements are all concerns for the renewable energy industry.
By: | March 20, 2019 • 8 min read

By the end of 2017, global renewable generation capacity increased by 167 gigawatts (GW), reaching 2,179 GW worldwide. According to the International Renewable Energy Agency (IRENA), this amounts to an annual growth rate of around 8.3 percent, the average for the past seven years.

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Rapid growth in wind and solar capacity installations in recent years has pushed up the amount of electricity that comes from renewable energy – from 18.5 percent in 2008 to around 25 percent today. That figure is projected to reach 30 percent by 2022.

Solar photovoltaics (PV) grew by 32 percent in 2017, followed by wind energy, which grew by 10 percent. Meanwhile the cost of electricity from solar PV decreased by 73 percent, while the cost of energy from onshore wind power dropped by nearly a quarter between 2010 and 2017.

By all accounts, renewable energy is a booming business. But it’s not one without its fair share of risks. Here are seven of the risks that will challenge the industry as it grows and matures during the next few years.

1) Those Pesky Tariffs

The remarkable growth of solar energy in the U.S. makes a clear case that increases in deployment are closely tied to decreases in costs. Solar is competing with other low-cost fuel sources, so even the slightest increase in the price of modules can mean that homeowners, utilities and businesses will choose an alternative for their power generation.

That’s why these tariffs present significant risk to the domestic renewable energy industry. When hardware costs rise because of import fees, some projects will never come to fruition, which hurts job growth and economic investment — a missed opportunity for growing the U.S. economy.

The U.S. will likely continue to import 80 percent to 90 percent of solar cells and modules. But at a higher cost due to tariffs, some utility-scale projects may be scrapped or put on hold for budgetary reasons, and solar may be out of reach for many homeowners, driving up prices for ratepayers.

2) The Political Battle Over Green Energy

The United States spends $37.5 billion on subsidies for fossil fuels every year, according to an estimate by Oil Change International. Through direct subsidies, tax breaks, and other incentives, U.S. taxpayers help fund the industry’s research, operations and electricity generation.

Such subsidies have constrained the growth of renewable energy, while the fossil fuel industry has simultaneously used its influence to spread misleading information about climate change. The industry has been aware of the risks of global warming since the 1970s, according to researchers, but has responded by funding climate disinformation campaigns, aimed at casting doubt on both climate change and renewable energy.

Despite scientific consensus, climate action remains a highly partisan issue in Congress, complicating efforts to move from fossil fuels to clean, renewable energy.

This conflict is shifting to center stage, since the Feb. 7 release of the Green New Deal proposal, sponsored by Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Ed Markey (D-Mass). The non-binding proposal calls for “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources.”

The current projection is for renewable energy to account for about 31 percent of U.S. energy generation by 2050, with steep drops for nuclear and coal.

The controversial proposal, however, suggests an accelerated timeline: global reductions in greenhouse gas emissions from human sources of 40 to 60 percent from 2010 levels by 2030; and net-zero global emissions by 2050.

Backlash against the proposal isn’t likely to hamper growth of renewable energy production, but it could place increased scrutiny on industry developments. Widespread support for the proposal, on the other hand, could inspire rapid growth that outpaces existing risk management controls.

3) Access to Rare Earth Metals

Critical and rare metals are vital for renewable energy technologies, such as electric cars and solar panels. Solar panels require tellurium, one of the rarest elements on Earth.

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The amount of rare metals required for production isn’t enough to raise concerns about shortages. However, production of many essential elements is concentrated in just a few countries. China in particular, mines 93 percent of the world’s rare earth elements. If China’s ports were impacted by a natural disaster, for instance, world trade and the global economy would feel the repercussions.

Having a near monopoly on crucial elements also allows countries to take liberties with access. When a conflict arose between Japan and China in 2010, for instance, China halted all shipments of rare earth elements to Japan, which the country needs to manufacture hybrid cars and electronics.

In addition, some critical and rare minerals are by-products of much larger mineral operations, meaning that these by-products are vulnerable to market fluctuations. If the copper price falls, for instance, then the production of its critical by-products will also be at risk.

4) Rise in Nat Cats

The equipment related to solar and wind generation has proven reasonably resilient to bad weather. When Hurricane Maria tore through Puerto Rico, a 645 kilowatt rooftop solar array on San Juan’s VA Hospital continued to operate 100 percent post-storm, despite 180 MPH winds, thanks to the flexible racking and anchoring system used to keep the solar panels in place.

The “new normal” of Nat Cat frequency and severity, however, remains a cause for concern. Average solar claims severity in the last five years has increased by 87 percent, mostly as a result of the greater impact of weather-related losses, wrote insurer GCube in its 2016 Cell, Interrupted report.

Reports of solar panels exploding into pieces after the wildfires across Northern California in October 2017 were cause for concern. While the occurrence was likely due to the overwhelming strength of the fire rather than the panel quality, the industry is monitoring the situation to ensure that adequate standards are in place for panels and panel systems.

As extreme weather events continue to plague the United States, manufacturers and installers of renewable energy equipment will need to keep innovating to ensure their products have the resilience necessary to withstand increasingly volatile climate risks.

5) Liability Risk

Exposure to the continuous low-level hum of wind turbines has been reported to produce health problems including sleep disturbance, headaches, tinnitus, ear pressure, dizziness, vertigo, nausea, visual blurring, tachycardia, depression, irritability, problems with concentration and memory, and panic episodes. These are grouped under a term “Wind-Turbine Syndrome” which is seeing increased use and generating a variety of studies.

Whether symptoms claimed are actually associated with windfarm sound or vibration remains something of a matter of debate, and engineers are working to dampen the noise generated by these devices.

Other health concerns surround the strobe-like “Flicker effect,” or the shadows and reflections cast by the whirling blades of wind turbines may trigger seizures in some individuals. The flicker affect predominantly affects people who suffer from photosensitive epilepsy and experience seizures in response to certain environmental triggers.

Animal health effects are also a concern. Wind turbine blades can be hazardous to birds and bats, with the most significant number of encounters involving predatory birds like hawks and eagles.

Federal regulators have brought criminal charges to protect wildlife in the case of windfarms placed in migratory paths. One site has incurred more than $500,000 per year in bird strike mitigation measures.

In January, however, the Trump administration walked back a portion of the Migratory Bird Treaty Act of 1918, re-interpreting the Act to no longer prohibit the inadvertent deaths of birds due to operations such as oil drilling, wind turbines and communications towers.

Still, federal action would not prevent protest from environmental and conservationist groups, and the industry must remain cognizant of the potential for brand risk exposure associated with a pattern of activity fatal to wildlife.

6) Bye-Bye Tax Credits

A formidable challenge for renewable energy is the extension and phase-down of the Renewable Electricity Production Tax Credit (PTC) and Investment Tax Credit (ITC). The PTC and ITC have been key financial drivers for wind and solar power project development and help sustain the supply, construction, management and operation of renewable power generation assets.

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The tax credits were extended through 2019, with a phase-down annually. For the U.S. wind industry, for example, the value of the PTC drops to 60 percent in 2022 and 40 percent in 2023 before disappearing entirely in 2024.

The wind industry insists the sunset of the PTC will not slow growth. But project owners will have a financial void to fill when the PTC expires. The use of conventional project finance could mean raising prices making wind power less competitive.

A 2017 report published by the Department of Energy noted that expected wind capacity increases to 10–13 GW in 2020, “forecasts for 2021 to 2025 … show a downturn in additions in part due to the PTC phase-out.”

7) BEAT May Give Investors Pause

A pain point for renewables came in the form of 2017’s Tax Cuts and Jobs Act. The sweeping tax legislation decreased the federal corporate income tax rate from 35 percent to 21 percent, reducing tax liabilities for companies and reducing appetite for tax credits.

Along with the corporate tax cuts, the new tax law includes the Base Erosion Anti-abuse Tax (BEAT), which attempts to ensure that corporations cannot use cross-border payments to lower their tax bill. But it also lowered the value of the production tax credits and investment tax credits that are used to help finance wind and solar projects, potentially making renewable projects a less attractive investment.

However, questions remain as the tax credit drops down and it is uncertain if stakeholders will lose their appetite for renewable projects. One or two tax equity investors left the market soon after the details of the bill were released. That’s a small number, but still enough to impact a market that included a total of 35 investors for both wind and solar in 2017. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]