On Aon Podcast: Dive into the Rapidly Evolving Renewables Industry

Richard Dudley:
Hello, everybody. My name is Richard Dudley and I'm the Global Head of Climate Strategy here at Aon. That's a role I've been doing for almost two years now, having left the Commercial Risk Global Broking Center in London. My job really is to think about all the different ways that Aon should be driving growth and impact on products and services that support our clients in their climate journeys. Obviously, one massive area where it's very clear that there's huge changing happening in the economy is in the energy system. Particularly, today, we're going to talk about one aspect of that with two of our foremost experts in Aon. We're going to talk about the renewables industry, which is obviously a dynamic. It's an evolving sector. Climate change is raising temperatures around the globe. Every time I read reports on these things, the stats seem to get scarier and the investment that's going into renewable energy is just colossal.

I'm sure Mark and Guido will have a few facts and figures for us as we go through the discussion. But the industry already represents probably trillion dollars of investment and it needs to represent an awful lot more trillions if we're going to successfully deliver on the energy transition that's required to deliver on the Paris Agreement. I think for the industry to really succeed in making that level of investment, our industry, the insurance and the reinsurance industry, perhaps specifically, which we're focused on today, has a really key role to play in mitigating that risk, unlocking the capital that's required to facilitate this huge level of investment that's required across the world. I teased you earlier by mentioning their first names. I'm very delighted that I've got two of our experts in Aon with us today to discuss this with me. We have Guido Benz and Mark Potter. Guido is currently the CEO of our Global Renewable Energy Practice in Aon, and Mark is the Renewable Energy Leader industry vertical in EMEA. That's – for those of you that are not familiar – that's Europe, Middle East, and Africa. Welcome, everybody. Thank you for joining us.

Guido Benz:
Thank you for having me here today, Richard. I'm excited to be part of the Aon podcast today. I have to say, when I see the impact climate change has been taking over the past years and having been in an industry endurance period for many years, to be able to be now in a role where I can actually actively contribute how the industry can really support energy transition and a shift towards renewable energy, it really makes me feel passionate about that. I'm very happy to discuss a little bit more about this subject during today's podcast.

Richard Dudley:
Fantastic. Mark.

Mark Potter:
Thanks, Richard. It's a pleasure to be here today. I'm very passionate about the renewables industry. I've been in this industry now for about 16 years on the insurance side. It's been phenomenal to see how fast that's developed and grown over those 16 years. I'm still so excited about actually what its potential is for the future and happy to be playing a role within that.

Richard Dudley:
Well, it's great to have you both. Having had the pleasure of working with you both, I'm very excited about this conversation. Thank you for joining us. Just before we get going, I'm going to ask you something completely different. It's got nothing to do with renewable energy at all, just to warm up your vocal cords. Maybe I'll start with you, Mark, as you finished off there. If you were joining the industry today, as in the reinsurance industry or some part of it, insurance or reinsurance, what advice would you give your younger self knowing what you know now?

Mark Potter:
Oh, there's lots of things I'd say to a younger self of mine about what I do, but what I'd probably say is try to specialize in something that you enjoy doing, but also as well to have a career path in mind, but also as well be flexible as regards to what opportunities come along the way.

Richard Dudley:
Okay. Play what's in front of you, to use a supporting analogy, I suppose, is a good part of that. Yeah. Guido, how about you? Same question.

Guido Benz:
All right. I wouldn't say entirely different from what Mark mentioned. I think one thing is whatever you choose, choose something where you have a lot of enthusiasm for and passion for in terms of what you're doing. I would say a professional career is all about life-long employability. I think it's about taking opportunities, taking chances, taking opportunities, taking risks as well.

Richard Dudley:
Thank you both. Okay. Let's get into it. We're here to talk about the renewables industry. There is quite a lot of volatility or there seems to be in some of the risks that are impacting investment levels in the industry. We said at the top of the call that this is an industry that needs dramatic levels of investment if we're going to deliver on the Paris Agreement and the nationally-defined contributions that come with that. Where's that volatility coming from? Guido, maybe I'll start with you, give us a few of the risks that you think are challenging investors and project developers when it comes to renewables.

Guido Benz:
Well, I think we have seen quite a few contributing factors to that volatility topic. I think, on one hand, I think you cannot recognize changing weather patterns that we see. I think it's in almost everyday's news these days. We've seen that trend over the past number of years having an impact and that plays one part of it, but we've also seen geopolitical developments coming out of the pandemic, which put a lot of industry sectors into a challenging position, is one aspect, and it puts sustainability topics a lot more onto a center stage. But then I think after that geopolitical developments that we've seen with the Ukraine and Russian conflict on one hand, and I think now, more recently, we don't know exactly what it'll do, but the Middle East, I think, are additional contributing factors that make it a lot more difficult to predict which directions the energy sector and renewable energy sector will take if, at the same time, we're confronted with the real tangible effects of climate change.

There is a need to action on one hand. At the same time, we've seen the impact of the pandemic on supply chains. That has driven additional challenges to the industry sector. We're seeing now the impact of inflation and changing interest rates. I think all aspects that drive volatility, that create challenges to the industry sector as well as opportunities. Lastly, if we look at the predicted investments, I think you referenced some numbers there, Richard, there, in terms of overall investment globally into the renewable energy. The energy transition sector suggest there's a lot of growth predicted by the leading place in the industry. Now, that requires talent and basically being able to develop the skilled workforce. To actually allow to implement that kind of growth is an additional challenge that we see clients confronted but also the endurance industry actually affected by.

Richard Dudley:
Yeah, so just a few challenges there. Guido, some quite significant risk there. Obviously, I think it's already clear what the link is to us and what our role is, but we'll explore that in a little bit more detail perhaps during the podcast as well. But Mark, is there anything that you think is missing there at all that you would emphasize from your experience, particularly in the European sphere perhaps?

Mark Potter:
I think that Guido's covered a lot of the key topics there and especially in relation to the current environment when it comes to problems with inflation and the knock-on effects to the supply chain. I think it would also equal there, as well as in terms of that impact that's been had on interest rates over the period, and then the knock-on effect that that's then having to reevaluate project economics, and does it therefore still make economic sense for some of the projects to go ahead as what was originally planned. I think that's what we've seen in Europe in particular, where we've seen project investments reassessed and impact in some of the projects that were originally planned.

I think, therefore, what developers are looking for, when they're looking at the volatility in the sector, is the response from regulators and the government to respond fast enough to the changing geopolitical environment that we've seen and then for that to be acknowledged to help those project economics again. We've been enjoying a great period where the industry has moved on phenomenal leaps and bounds and costs have reduced significantly that have really enabled the sector to move forward. Now we're at a transition point where really that needs to be reassessed again as well to make sure that the playing field that governments are creating is sufficient enough as well to make sure that these projects happen and that we meet the goals that we're all setting for ourselves.

Richard Dudley:
Okay. It is interesting, isn't it? Because there are lists of challenges there. Got everything from natural hazards and the way that weather is impacting both construction and operation of renewable energy systems. You've got the whole political risk aspect, which is obviously top of mind for many just now with what we're seeing in the Middle East and rising tensions in the far East and various other places as well. You've got the technology risks that you talked about. You've got all the cost increases in inflation that are impacting expected investor returns and a few other things to boot. Where's the real challenge for the sector in trying to address all of those?

Mark, you just touched on a couple of points there, which I thought were interesting. One of which was the link with government policy and frameworks that company's building. I've personally been a little bit engaged with some of the work that's been going on on carbon capture utilization storage, of course, which is not strictly renewables, but there are some similar themes and the way that the UK government is trying to stimulate much larger levels of private sector investment. Would you say that's one of the biggest challenges for renewables or are they really focused in on the individual challenges you mentioned earlier? How do they view it as an industry, I suppose, is the way I'm trying to give that question. Mark, any thoughts from you? And then we'll come to Guido.

Mark Potter:
Sure. I think there is a key regulatory risk that everyone's managing and there's a few areas that people are looking for responses around. One could be around making sure that planning regimes allow for projects to be materialized as quickly as possible, to help shorten those project development timelines, to make the projects more feasible, and to allow you then to move on to the next one as soon as possible. But then equally as well, to look at the power prices that have been set for some of the renewable energy projects. In particular, we've seen plummeting power prices for the last few years as we've enjoyed the changing economics around the projects, but really some of these probably need to be evaluated again in some geographies, especially in light of current inflationary pressures and interest rate pressures have impacted projects. I think that's a big thing that our clients and companies within the industry are looking at and looking at how to manage that.

It probably then impacts where you actually look at, where you then look at your future pipeline and where you're going to build, what types of projects you're going to build, and where and what technologies you're going to focus on, because it all goes into the mix of where are the most favorable places going to be for these project developments. There's a lot for developers to take on board. When you factor in some of the other aspects that Guido mentioned in there, such as risks associated with new types of technologies or the extremities of weather patterns we're seeing at the moment and the impact that that's having on projects in certain locations, there's a lot of things to factor in for developers in the sector and there's a lot of different types of risks and exposures that they're managing.

Richard Dudley:
Okay. Guido, maybe just to ask you something slightly different to that question, have you seen any, that might be territories or developer types or elements of the industry, which are addressing these challenges more successfully than others? Or do you think these challenges are equally challenging in the way that Mark's described? Whether you are in offshore wind of the east coast of the U.S. or whether you're in solar in the Middle East. How would you characterize that? Does it vary? Obviously, each technology has its own particular challenges from a tech perspective, but some of those broader risks, is it very much the same picture?

Guido Benz:
I think there are regional differences to an extent, particularly anything related by to Nat Cat, Nat Cat concentration, or Nat Cat risk for these type of exposures. Of course, also, you'll see different technologies applicable in different regions. You won't see, say, floating offshore wind, for example, in every region to the same extent. But I think the one area that probably addresses the majority of the markets and of the regions is really the regulation and permission process aspect. I think that's an important one that really can hold back but also actually accelerate. If addressed properly, can help accelerate the energy transition.

I think a good point in case there is, for instance, the Inflation Reduction Act in the U.S., which really helps to accelerate unlocking that capital, because generally, I think capital is there, is willing to be deployed into renewable energy and energy transition projects, but in order to build that on sustainable basis, it has to be done in a way that allows projects to actually also be profitable. I think more recent headlines have demonstrated some challenges to certain industries, certainly in the wind industry for instance. We negotiated PPA structures, for instance, because the economics didn't work out anymore.

I think their government bodies have a key role to play to really help facilitate that energy transition. I think everyone is in agreement. We do need to help that facilitate. I think we discussed in previous conversations about the energy trilemma in terms of, on one hand, we have companies out there in the general sector, in the banking industry, to have very strict sustainability topics, almost like pulling back in supporting certain industries that are actually required to be able to succeed to facilitate energy transition, and at the same time, the technologies out there that need to be deployed in really helping that transition. I do think government brought itself a key role to play in this entire process.

Richard Dudley:
Guido, thanks for that. What I really liked about your answer there was you started to talk about some of the real positivity that's out there that is driving significantly faster levels of investment into the industry. You said that we need a bit more government action. You also referred to the fact that we'd seen dramatic impact from the Inflation Reduction Act, for example, in the U.S., which has really attracted very high levels of investment into some parts of the industry. Great thing. Maybe continuing that theme and perhaps I'll come to you first, Mark, what else should we be positive about in terms of where we think the industry's going? We've talked a lot about the challenges it has and some of the things that might be holding it back. What else is helping to push it forward? Guido hinted at government action and incentives, but what else is helping to push it forward?

Mark Potter:
I still a strong believer that the business case around renewables is still very, very strong. Although there are some current pressures around the inflationary environment and the supply chain that we're seeing and the regulatory environment in some areas, the dynamics are still strong to support future growth within this sector. For renewable energy companies or companies moving into the sector, I think that there's a great opportunity there for further profitable growth within the sector. The whole supply chain needs to grow significantly if we're going to meet the global targets that will then lead us to our overall net-zero decarbonization goals. That, to me, presents a wonderful picture for growth right across the sector. There's huge amounts of innovation already going into it and lots of development happening already, but the scope is still huge in terms of where this sector could go in the future.

Richard Dudley:
We're saying investor confidence is still high. In fact, it's being encouraged to be higher by some of the actions that Guido referred to. There's still a big demand for green energy, so there doesn't seem to be any lessening in demand for what the industry is producing and how it's producing it. It's a challenge, more than anything else, but the whole concept of the workforce and whether or not there's enough talent to deliver on the volume that's required in the industry is one of the challenges we didn't spend a lot of time on earlier. But at the moment, it doesn't sound like it's holding the industry back. Guido, would you agree with that?

Guido Benz:
It may not hold the industry back. I think we do have feedback from clients that it is challenging to find skilled labor, but I think there are regional differences. But I think the bigger question there is in terms of what does the industry undertake to actually develop the next generation of qualified workforce to support that transition. I think there is also regional differences there. If you look at, for instance, the offshore wind industry in the U.S., we're really talking about not just building wind farms in the sea. I think this is about developing an entire new industry sector that hasn't been there before. We have certain regulatory conditions that require even more local capabilities built.

This has an impact on that for one example. But also, when you look at just the existing infrastructure, say suitable port facilities, these are really elements of that entire industry sector that are in the making or need to be built that creates opportunities and challenges, that also creates opportunities to maybe look at redeploying workforce and skilled labor into that new sector. I think the new renewables sector was targeted as developing something like 12.3 million new jobs over the next 10 years or so, I think, roughly. It's quite a massive opportunity also in that respect, but it's about what can the industry undertake to create or help develop that next generation of qualified labor to support that.

Richard Dudley:
Great. Thanks, Guido. I think a big takeaway from me from that is that your comment about the, this isn't just putting a turbine in the middle of a sea. This is just an entire industry that's attached to it in order to connect that to the grid, and to make it all work, and to make sure it's financed, and that everybody involved in it, expectations are met, and so on. It's a very complex picture. Maybe we'll move on perhaps to our last area then, which is just to think through, in particular, what Aon is doing to help drive development and growth in this industry. Because we've heard a little bit about their challenges in the industry and some of those are coming from external factors, some are from internal factors. We've heard a bit about the opportunity and how there's still high levels of invested demand. There is government action that's beginning to happen that's stimulating that still further. A lot of demand for the grid energy, et cetera.

What are we doing as Aon to help speed that all up? Certainly, in commercial risk and the reinsurance, or the risk capital as we call it, we're in the business of understanding risk, mitigating risk, and transferring when necessary. We'll take that as red, but that's what you guys are doing. But where do you think we are really helping to drive that further investment for our clients? Maybe, Mark, a couple of comments from you, because I know you're involved in some of the really big players in Europe, and then perhaps a more global perspective from Guido, if that's okay.

Mark Potter:
Sure. Thank you, Richard. Maybe starting off with the last thing that we've discussed in terms of the workforce really and what's required around there. I do think that there's actually a significant amount of investment that's needed in the workforce and lots of training and development that's going to be required to create that workforce of the future. We're already seeing, in some places, contractor shortages, for instance. It's something that's already biting the industry today and it's something that's going to require much more investment in the future. What our clients also will face as well, as well as actually just hiring, and training, and retraining people, and transitioning them maybe from other types of roles into green roles, the other bit as well is around the attraction of talent, creating benefits packages that will attract talent, retain talent as well, as well as actually looking at the training development schemes for them.

We have people within the organization as actors, consultants, into those HR teams to help with the attraction and retention of talent that's required to develop these projects in the future, but the whole industry has a significant role to play in that part. We obviously play a key role in terms of understanding and assessing risk. We employ risk engineers from industry who help us with that, both in terms of understanding technology risk and helping clients understand the risks that they might face and how best to transfer some of those risks. But also as well, looking at some of the really difficult weather risks that some of our clients are facing across some of their projects, and then looking at innovative transfer mechanisms to be able to offset that, and using different types of risk capital to be able to transfer those risks effectively for our clients and help them create investable projects, and make them more economic where possible.

I think probably the final area I'd probably catch up on as well is that a lot of growth in this sector comes from new construction projects, but equally as well, a lot of our clients are looking at new acquisitions and mergers to be able to bring in new capabilities to be able to push forward the renewable energy sector as well. Our teams play a key role in terms of helping to de-risk some of these investments too, be it in terms of looking at tax liabilities or whether it be looking at the cyber risks or the human capital aspects of those businesses as they onboard them. There's a lot of ways that we can potentially help to understand risk and transfer risk. It's across all sorts of different areas that we're helping our clients, Richard.

Richard Dudley:
Yeah, that is quite a little smart. Thank you. That's very impressive selection of things. In fact, it covers so many different things that Aon does, which I think is one of the beauties of when you think through actually not just this industry but the climate topic generally. It actually impacts. What's the name of that film last year? Everything Everywhere All at Once, and that is literally... It's a little bit like what you're saying with renewables. But what would you add to that, Guido, from your... You are seeing this from the global perspective and you are seeing, as you said earlier, on a few regional nuances. Mark's covered a number of the core areas where we assist. What would you add?

Guido Benz:
Yeah. I think Mark has given a very comprehensive overview there. But I think when we look at our client base, then actually we see clients at very different stages on their journey along the energy transition curve. I think it's about understanding where they are at every point in time and how we can support them along their trajectory. That means different clients with different needs there. On one hand, maybe you have clients that are still very heavily on fossil fuel-based energy forms dependent but slowly moving into a more sustainable business model there with either investments, acquisitions, or divestments. That's where the M&A element comes in that Aon has an offer there.

But it could also be in terms of how they're deploying their captives perhaps that they have in the energy sector, particularly common ground, and what does that mean in terms of how they could use their captive, either their own cap for captive solutions that then can contribute in supporting such a journey. Also, from an endurance perspective, in terms of how programs are structured, what are risk transfer mechanisms that come into play along that front. I think, generally, the challenging market environment creates the most innovative solutions. The tough times is what really drives innovative solutions. I think, nowadays, we have a market environment that really allows for outside the box thinking and really driving innovative solutions.

I think with our capabilities on the risk consulting side, the one hand, with the reinsurance side and the facultative side and direct side combined, there's a lot of capability can bring to the table there and really help clients look at some of their risk transfer mechanisms in more than one way and certainly more than just the traditional way. They have been doing it in the past. Now, cap is just one element. Mark mentioned cyber as one of the elements that's come into play. I think to the point earlier in the conversation, we see also more demands on the political risk front as well. As you go into different geographic territories, that is a topic that comes up more and more. I think, also, there, we can look at the tailor-made solutions we spoke, the joint solutions that we can support clients with.

Richard Dudley:
That's fantastic, Guido. Thanks. If I add all that together, that, for me, actually, is a perfect summary of where the opportunity is for Aon generally in climate change actually, because a lot of it exists in our existing solutions. You've talked about a wide range of things that Aon does from the talent advisory business to the M&A practice, to the cyber team, to the natural hazard modeling. There's a massive range of things there which are directly applicable. You also just mentioned there, Guido, the need and requirement for us to innovate as well, sometimes around the edges or to tailor-make some of those products to make them more applicable for certain situations, but also actually in new product areas full stop. What I really liked as well was the last comment where a lot of our job is to help stimulate finance flows. Working with the finances as much as we work with the people who they're financing is equally critical, I think. That's a really good summary and thank you both for that. That's our show for today. Thanks everybody for listening. Look out for the next episode of On Aon coming soon.