5 LESSONS SINCE TRANSITIONING INTO THE AUSTRALIAN MARKET

Australia is one of the most dynamic and exciting markets for renewable energy in the world. With abundant natural resources, strong policy support, and growing consumer demand, the country is poised to become a global leader in the green transition. However, as with any rapidly expanding markets, there are also significant challenges and risks that need to be addressed and managed. 
 
Some of these risks stem from the fact that Australia is leading the world in terms of the size and scale of its renewable projects, especially in onshore wind, solar and battery storage. But the recent ramp up in Federal Government support has also raised questions about the speed at which Australia plans to instal new projects and the risks associated with transitioning so rapidly. In the past we have seen high growth years aligning with loss heavy years, and while there is significantly more experience in the Australian renewables industry today, the combination of new technology, larger equipment, and the rapid rollout of large-scale projects is a cause for concern. 
 
Growing market-specific risks also affect the viability and profitability of projects in the country. It’s these risks that led GCube to transition to locally approved underwriting paper in the Australian market earlier this year. This move enabled us to offer more tailored and competitive solutions to our clients and help us better understand and respond to the local market conditions. 
 
We’ve learnt a lot since officially entering the Australian market. In this newsletter piece, I will share 5 key lessons learnt, and how our transition has helped us to improve our service and value proposition for our clients and brokers.
 
1. Supply chain issues are worse in Australia than most other places
 
Australia continues to struggle with supply chain disruptions, which are being caused by a combination of factors that make the country a unique and challenging market for renewables. 
 
First, Australia is geographically isolated from the rest of the world, which means that it takes longer and costs more to transport materials and equipment from overseas. Second, many of the project sites are in remote areas that are difficult to access by road or rail, which adds to the logistical complexity and cost. An example of this is the considerable costs of mobilising cranes to remote sites in Australia compared with other parts of the world. Third, the demand for renewable energy in Australia is growing rapidly with new political support, adding pressure to get projects completed at speed.  
 
These issues create pressure on the supply of components and materials. As a result, some projects in Australia have experienced unprecedented delays in receiving their orders. We have seen increasing instances of delays, up to and even over 18 months, in sourcing replacement panels, blades, and other components. These delays are much longer than those in other countries with large renewables markets, such as the US, China, or Germany, where the average delay is about 8 months. 
 
2. Hail risk is a major issue
 
One of the major challenges facing the solar industry in Australia is the threat of hail damage – but this risk remains underestimated. Our analysis shows that a large swath of the East Coast, from southeast Queensland to Victoria, is vulnerable to severe hailstorms that could wreak havoc on the solar farms in the area. 
 
This large, coastal region has seen a rapid expansion of utility scale solar, with the total installed capacity increasing from less than 200MW at the end of 2017, to well over 3GW currently operating within this exposed area and with many more projects in the pipeline. However, this growth has not been matched by adequate risk management as mitigating against hail has proven to be extremely difficult. The industry is learning, however there is a long way to go, and we will only truly see the effectiveness of improved risk management in the Australian spring and summer when we are likely to see more hail events. 
 
The situation is worsened by the supply chain issues that make it more difficult and more costly to replace damaged panels. Therefore, it is imperative that the solar industry takes proactive measures to mitigate the hail risk and protect its assets. 
 
3. Australia’s weather systems and geography exacerbate Nat Cat risks
 
Australia faces more severe and frequent weather events than many other countries due to its location and geography. It is situated between three major oceans, the Indian, Pacific, and Southern, which affect its climate variability and extremes. 
 
One of these extremes is the La Niña, which results in moist, easterly winds blowing from the Pacific Ocean towards Australia, bringing heavy rainfall and flooding to some regions, especially in the south-east. 
 
This was particularly intense and prolonged from late 2020 to mid-2022, when Australia experienced record-breaking precipitation and widespread major flooding. However, outside of the obvious catastrophic events, there are less obvious issues emerging, such as the higher-than-normal humidity causing problems with electrical and mechanical equipment, and the highly saturated soils destabilising underground cabling and structures. 
 
However, now that we are transitioning into an El Niño, we are expecting large periods of dry and hot weather, which will massively increase the risk of large-scale bushfires due to the increased vegetation caused by the higher-than-average rainfall during the La Niña. 
 
The unpredictable nature of the Australian weather systems mean we need to be prepared for sudden and dramatic changes in climatic conditions. This is just one of many climate drivers that affects the Australian continent, and we need to keep learning and updating our understanding of Australia’s weather and Nat Cat risks, as they have significant impacts on the insurance and renewables sectors. 
 
4. BESS is a massive part of Australia’s energy transition
 
Battery Energy Storage Systems (BESS) are playing a crucial role in Australia's energy transition. However, they also pose some challenges and uncertainties for us as underwriters. We see a lot of risks involving batteries, but the market doesn’t have enough field data or experience to fully assess them. At this stage, minimum spacing requirements between equipment, procuring replacement components, and the effectiveness of fire prevention, detection, and suppression systems, are still mostly yet to be proven in practice.  
 
Moreover, the revenue models of batteries are different from those of wind and solar farms, which generate electricity directly. Most of the larger batteries being built in Australia are standalone systems that can operate in various ways, such as on an arbitrage basis, as firming capacity, to provide grid stability, on a contractual basis, emergency capacity, or a combination of any two or more of these models. This means that they are exposed to price fluctuations and market risks that we need to understand and account for, and it is yet to be seen how losses will be adjusted on these new large-scale projects. 
 
Therefore, while this is an exciting new part of Australia’s energy mix, we are taking a “cautious approach” to underwriting batteries until we have more information and confidence in this emerging technology. 
 
5. We’re building local knowledge
 
One of our main goals in entering the Australian market is to build on our 20 years’ of writing Australian risks from London and further expand our local knowledge and expertise. This gives us many advantages, such as understanding the market dynamics, the key players, and the specific risks that are unique to Australia. 
 
Being on the ground also allows us to communicate more effectively and efficiently with our clients, brokers, and other key stakeholders. We can make faster underwriting decisions without having to deal with time zone differences. This helps us deliver better service and value to our customers and partners. 
 
As we continue our transition into Australia, we are committed to being a sustainable player in the market, not just a short-term opportunist.