London, 29 November 2011: Commodities Now

Financiers and operators of power plants using renewable fuels face a broad range of risks and significant difficulties in managing them, according to a new survey, Managing the risks in renewable energy conducted by the Economist Intelligence Unit and sponsored by Swiss Re. In the survey of 284 financiers, builders, designers, owners and operators of power generating plants using renewable fuels, 70% said they are successful at identifying their risks, but only 61% said they are good at reducing the risks and 50% said they are good at transferring risks to others. The survey focussed on power producers in Western Europe, the U.S. and Australia.

The obstacles to more effective risk management include restricted availability of industry data and of suitable risk transfer mechanisms, respondents said. Other obstacles include lack of information on internal operations and insufficient knowledge of weather markets and related financial products such as weather-based derivatives. In addition to survey data, the report was based on in-depth interviews with 15 senior renewable energy executives and other industry experts.

The study identified eight types of risk facing the renewable energy industry, including financial, business/strategic, operational, political/regulatory, and weather related volume risk. The challenges of managing these risks are expected to increase as the scale and complexity of renewable-fuel power plants grows, in response to growing demand for low-carbon electricity. Indeed, in 2010 global investment in new renewable energy projects exceeded investment in new fossil-fuel plants for the first time.

“The survey highlights the many different exposures facing the renewable energy industry and the significant challenges the industry faces in managing them effectively,” said Aviva Freudmann, Research Director for Continental Europe, the Middle East and Africa for the Economist Intelligence Unit, who directed the study.

Following are other key findings of the research:

- Renewable energy is growing in strategic significance in the power industry, and is the focus of ever-larger investments. Whilst 33% of companies said renewable energy is highly significant for their business strategy, 61% expected that to be the case in three years’ time.

- Respondents consider financial risks—the risk of insufficient access to capital—to be the most serious risk facing power producers, particularly in early project stages. More than three-fourths (76%) of respondents cited financial risk as significant. Market risks and business-strategic risks (eg, the risk of technological obsolescence) were also rated as significant.

- Industry players are becoming more cautious, taking a variety of measures to reduce exposures and transfer the remaining ones to third parties. One emerging way to reduce certain risks, such as weather-related and regulatory ones, is to diversify by geography and by fuel type. Many power producers try to contain operating risks by using only proven technologies—a strategy that will be more difficult to follow as plants become larger and more complex.

- By a wide margin, the industry chooses insurance to transfer financial risks to third parties, followed by capital-market instruments such as catastrophe bonds. Financial derivatives are a strong second choice. But the industry expects to rely less on currently known methods by 2014.

- Whilst weather-related volume risks are intrinsic to certain types of renewable-fuels plants, such as solar and wind installations, there is relatively little awareness of how to transfer those risks to third parties. Most industry players appear to retain those risks. A significant proportion (16%) do not know which risk transfer mechanism to use for weather-related volume risk; that proportion grows to 19% when asked about transferring such risks three years from now.

Ends --

About the survey

The Economist Intelligence Unit surveyed 284 energy and finance executives in August and September 2011. The survey sample had the following demographic characteristics:

Managing the risks in renewable energy is available free of charge at:

www.businessresearch.eiu.com/Managing-renewables-risks.html