Controlling costs: TSOs’ risk strategies need to keep pace with change

Flexible and resilient transmission networks are fundamental to the success of the energy transition, and for transmission system operators (TSOs) with fixed revenues, risk and finance leaders are focusing on finding ways to build operational efficiencies.

The future is electric. Demands on transmission networks will continue to grow exponentially, as will investment and the interconnectivity between networks. But making strides in the energy transition comes with its challenges for TSOs:

• While the existing power grid is based around centralized and large-scale power plants, solar, wind, and hydroelectric power are pushing generation assets further from load centers. Pushing into new regions with limited transmission infrastructure has the potential to create bottlenecks.
• The increasing reliance on intermittent, weather-dependent sources of power is demanding more flexible grids and optimization of operating systems.
• As consumers and businesses move towards greater electrification, behind-the-meter technologies such as electrified heating systems, electric vehicles and operational plants will create demand shifts. While this has the potential to create supply challenges as TSOs battle supply and demand variability, in practice, the real benefits of new technologies, such as the ability to charge during non-peak periods, should create opportunities for TSOs. 
• To create the foundation for the power system of the future, TSOs must invest heavily in their networks in terms of upgrades, extensions and interconnection. But with all TSOs facing the same challenges at the same time, demand is outstripping supply and inevitably supply-chain issues are ensuing, which have the potential to hold back project timelines, limit the purchasing power that TSOs may have had in the past and drive costs.  

TSOs are largely risk resilient and are making strides in embracing electrification and investing in growing their networks. TSOs are at the core of the global drive to carbon-neutral economies, and meeting regulatory targets that ensure they deliver on this while running a business efficiently will be a managerial imperative.

Risk management is prime for optimization

As TSOs look ahead to a 5-10-year timeline, risk management and risk financing strategies need to accommodate the changing exposures and pressures on this trajectory. Risk leaders need to identify where more value can be derived for the dollars spent.

To step up, TSOs need to understand and explore the range of products available to establish and grow retentions at an economical cost.

Wherever TSOs are in developing their risk retention strategy, alternative risk transfer solutions can be tailored to establish and grow retention mechanisms to support the business and reduce the total cost of risk. Alternative risk transfer can be used to allow TSOs to grow their risk retention over years using a stable capital model, that could ultimately assist in establishing a captive, without the strain of a substantial upfront capital reserve. Under this structure, insurers can agree to provide a payout that matches the sum of capital retained; this would only be unlocked in the event of a loss. This security enables TSOs to build retention funds gradually over time without denting the capital strength of the business in the short term.  

For TSOs with established retentions, optimization will be critical to ensure the retention vehicle is providing levels of security and capital efficiency compared to ever-changing insurance market trends. In a sector that is evolving at speed, risk retention and transfer strategies need to keep pace.

In the detail: property damage and business interruption trends for onshore and offshore power companies

TSOs (particularly offshore) have been subject to rate hikes. Onshore rates have approximately doubled, but during the last decade, offshore rates have seen a rapid hardening of the market, in terms of policy coverage restrictions and rates having more than tripled.

Looking ahead

The transmission sector hasn’t always been the first port of call for insurers when growing business, but TSOs are well risk managed and present an opportunity to grow revenue with a comparatively lower risk profile compared to larger power generation accounts. As power property insurance markets begin to soften, the outlook is brighter for TSOs than in recent years. Against this backdrop, making strides to optimize risk retention and transfer will help TSOs move through the energy transition with clarity.   

Download the full article to find out how TSOs can take full advantage of opportunities as electrification gathers momentum.