BILL CREEDON: Hello, and welcome to our Construction Blueprints podcast. I'm Bill Creedon, and I'm the Global Head of Construction for Willis. I'm your podcast host today. And I'm delighted to be joined by Rupert Mackenzie, the Global Head of Natural Resources. Welcome, Rupert.
RUPERT MACKENZIE: Bill, thanks very much for having me on the podcast. I'm looking forward to our conversation.
BILL CREEDON: Yes, I'm glad you're here. And I'm excited about today's episode because we're going to be going through, and really exploring, the current state of renewables-- the future of them, the implications, positively, possibly negatively to our customers. Lots to cover. So, let's jump in.
We've all said how exciting the evolving renewables market is, but can you share with everybody just how big is it? Maybe start with what you see as the scope of renewables. What do people usually include in that category and just how big is the opportunity here?
RUPERT MACKENZIE: We have an enormous opportunity ahead of us. If one looks at the International Energy Agency's projections of the development of renewable technologies and renewable infrastructure between now and 2050, they're forecasting an absolutely enormous investment in this space it's going to be required if countries are going to be able to meet their commitments under the Paris Agreement and some of the other climate agreements that have been signed at an international level.
Now, there's a huge amount of debate as to whether or not any country is going to ultimately get to where it needs to be. But there is going to be trillions and trillions of dollars of required investment between now and 2050.
And when one looks at what has been pledged by individual countries and what is required to meet net-zero requirements, we're talking a complete wholesale change in how energy, and particularly electricity, is generated across the globe over the next decades.
BILL CREEDON: So, it's pretty broad. It's global. No doubt. Are there certain areas of the world that you see this maybe becoming more the hotspots? No pun intended.
RUPERT MACKENZIE: Yes. I mean, I think when we're talking about renewable energy, we're talking about a very diverse set of different technologies. And depending on who you're talking to, people think of renewables in slightly different ways.
I think for the purposes of this conversation-- we're clearly talking about wind. We're talking about solar. We're also talking about geothermal. And I think we should also think about hydro as well because hydroelectric electricity generating is a renewable form of energy.
When one thinks about those technologies, clearly, there are areas of the world which are much more suited to the implementation of those. So, if we're talking about solar, for example, we're really talking about the Sun Belt-- probably ultimately-- as the main area where we're going to see substantial, world-scale investments in solar PV arrays.
Now, at the moment, we're seeing quite a lot of solar activity all around the globe. Time will tell as to whether or not some of those investments are going to be profitable. The sun doesn't shine everywhere with the same strength.
I think we've seen some investments which are less likely to stand the test of time in certain geographies. But I think if you look at your-- Bill, you and I are both sitting in the U.S. So, if you look at the southern part of the US at the moment, that's clearly a great location for solar investments. The same with North Africa, the Middle East, parts of Asia and into Australasia. All of those are going to be key geographies, I would suggest, for developing and building solar technology.
Now, solar doesn't work necessarily on its own. And many of these technologies don't work just as a standalone investment. They've got to be combined with battery storage to make grades reliable. And ultimately, to produce the stable and available capacity that every economy is looking to do.
And the same geographic limitations apply with wind. Wind has got slightly better geographical spread across South America, across much of Europe, into the North Sea, and then out into Asia as well. Wind possibly has got the most application from a geographical standpoint. But it's cost-intensive, quite labor-intensive. It's intensive in it's use of raw materials, whether that be the plastics required for blade construction or just the concrete that's required to go into the foundations for a wind farm.
So yeah, we are, I think, going to see different geographies focusing on different technologies. If one's in the North of Europe or in Canada, for example, where you've got high amounts of rainfall and the geography that supports hydro-- hydro, clearly, is a technology that's tried and tested, that provides an incredibly available source of renewable energy.
And we're seeing countries looking to build out their hydro infrastructure, and also looking at pumped hydro as well, where you're refreshing the reservoirs over time-- pumping water back into those when the grid has a lesser demand. And you can utilize excess grid capacity to pump water back up into reservoirs.
BILL CREEDON: Boy, you're hitting on so many hot buttons to talk about. I want to go to the hydro real quick.
RUPERT MACKENZIE: Sure.
BILL CREEDON: So hydro has had various responses around the world. You saw some countries invest heavily in other parts of the world, not their own, and have some projects that got some negative attention. Do you have any thoughts on that? I mean, I think that pulled it back a little bit. But do you then-- you're basically saying you're going to see more of those projects coming up, regardless of what we've seen.
RUPERT MACKENZIE: I would imagine so. I mean, if we're to meet net-zero and if we're to wean ourselves off hydrocarbons, as many people want us to do, then hydro, I think, forms an important part of that.
And wherever one looks to develop projects and build your own construction, there is a constant-- whenever there's modernization and development, there's a constant challenge around people not wanting projects in their backyard. And whether it be solar arrays or wind farms, there's going to be the same challenges.
I mean, I think when you look at hydro, hydro has a pretty good track record in terms of its safety, its availability. The technology is absolutely tried and tested. I mean, we've been producing electricity with hydroelectric turbines for decades-- forever. I mean-- and so why wouldn't we harness the power of water to provide clean electricity? It would make no sense not to expand activities.
I think the challenge will be finding continued locations, where there are opportunities to build new hydros. I think, increasingly, they're going to become fewer and far between. And it may be a question that we have to look to start upgrading existing plants, bringing in new turbine technology, which is more efficient, and producing a higher level of output than some of the existing plants, which will have been in operation for many decades.
BILL CREEDON: From the construction side, just to close that topic out, I mean, what we have seen is some of the construction of the hydros, and especially maybe from China into Latin America, where they came with some mixed results. And that's something that's been looked at by the marketplace.
I want to bounce back and look at the-- you talk about just the nature of renewables. Sometimes it rains, sometimes it's cloudy, sometimes it's not windy. And we just completed the placement of a project that is-- I'd call it-- the building of a long-duration energy storage, an energy island that tries to solve the consistency around deliverable 24/7, 365, and to have that ability. I think hearing what you're saying, that's something that-- we're probably going to see that industry expanding exponentially going forward. Would you agree with that, or are you seeing that?
RUPERT MACKENZIE: I take quite a pragmatic approach to the likely future mix of assets that are going to be required for stable grid operations. I mean, on the one hand, there's an aspiration to make grids as green as possible. And I think that's a great aspiration to have.
I think realistically, most grids are going to require support. There's a huge amount of advance that has taken place in battery storage and battery technology. I think there's still a lot more advances that we need to make if we're going to rely wholly on battery storage to provide grid reliability.
I don't think, sitting here today, that we would assume that any grid would just be able to operate just, for example, using wind and solar generation, combined with battery storage. I think there has to be some backstop assets that are available to grid operators to provide that level of availability and reliability.
And pragmatically, I think, we've got to consider a future with a range of different assets in most grids. Whether those backstop assets are traditional gas turbine assets or hydro, or nuclear, I think that remains to be seen. But I don't see, at the moment, with battery-- particularly with battery storage technology at the place that it is today. By 2050 will be in a place that doesn't have some reliance on some level of more traditional technology as a backstop.
BILL CREEDON: I think we could hit it on another session. But the project we just did, really it's not the battery storage per se. It's more having the ability to create energy and pushing it through with hydrogen and some other ideas around it, processes to then create the energy on demand to then put into the grid.
And I just think it's going to be a growing area for the construction space and I really look forward to seeing what happens there. You mentioned another piece that I want to hit on?
RUPERT MACKENZIE: Sure.
BILL CREEDON: So, you've seen a lot on AI. You've seen a lot of the data center growth around and the need for power that one of the biggest constraints on those is where are we going to get the power to fuel these.
Some talk comes out about SMR, small modular reactors, nuclear. Yep. Where do you put that? Do you put that in renewables or do you put it into a whole different category? And what's your thought on that?
RUPERT MACKENZIE: I'm personally don't think it's a renewable technology per se. But I do put it in. I mean, I think we should think of SMRs. Yeah, potentially as a clean energy source. Now excepting, of course, there is the challenge of what to do. Ultimately with, with the waste material, which is something we still as a world we haven't solved for yet.
And so, leaving that challenge aside, I do think we can think of nuclear as a clean technology. It's track record. Yes, whilst we're all aware of the incidences that they have been, its track record actually is one of the cleanest and most reliable and safest types of electricity generation.
That is in use. Small modular reactors are a great idea and it's going to be interesting to see how they develop. There are projects underway to really take SMRs off the drawing board and off the feasibility side of the industry into full testing and utilization.
And I do think potentially they have a place not just to add grid capacity, but also to support communities and industries in remote areas where there may be no other potential source of energy.
I think one of the challenges, however, with nuclear is historically, nuclear power has been used as a baseload and it works at its best when it's operating at near on 100% of capacity all of the time. And most reactors have been designed with that profile in mind. And most reactor technology considers that.
Now, there are some new nuclear designed-- reactor designs that are going through testing at the moment. Bill Gates's TerraPower in particular, has been designed to create a reactor that is happy being bought on and off stream at frequency to really be a baseload so to come in and step in when the sun isn't shining at nighttime or the wind isn't blowing and to be able to ramp up and ramp down its operations far more flexibly than a traditional reactor technology.
Now, time will tell whether those designs are as successful as the engineers behind them believe they will be and whether they're going to be able to provide the power that data centers currently need.
I mean, coming back to your question, Bill, on data centers, you and I have talked about this at length over the last year. We're seeing a tremendous demand for additional power being driven by the huge growth in data centers.
And I know your team are right at the heart of that, supporting a number of the biggest builders of data centers and you've got a plethora of projects that you're working with across the globe. It's interesting. And data centers, as we currently understand them, do require an enormous amount of constant power, particularly when those AI tools are learning. They need to have 24/7 power and a huge amount of it.
Now, we've all seen the recent news out of China, which seemed to suggest that they've come up with an AI capability that requires far less energy. I think lots of people are very intrigued to see a bit more detail around that and understand that a little bit more deeply.
But I mean, the AI is coming and it's coming fast and as we understand it today, is going to require a huge investment in grid capacity and is going to take up a huge amount of grid capacity in many geographies.
I mean, I saw a statistic, I think, from Ireland where people are planning quite a number of data center builds and I think it's something by 2028, something like a third-- over a third of Ireland's electricity is going to be consumed just by data centers. That's the projection, which is a phenomenal amount of power.
BILL CREEDON: Wow. Really interesting. It makes me want to talk a little bit about-- we all talk about everything going on. We talk about renewables. Everything's happening. But let's face it, traditional energy isn't going away in traditional power sources. Would you agree with that?
RUPERT MACKENZIE: I mean, I think if you look at all of the statistics that have been issued to date around what the potential energy mix is going to look like in 2050, we use 2050 as a date because there's been so many international agreements around what the world hopefully might look like by 2050.
But if you look at that energy mix in 2050, the IEA and other projections seem to suggest that, yes, we're going to see a tremendous increase in the role that's going to be played by renewable technologies, but we're also going to see a substantial continued involvement by some of the more traditional power sources.
And yet there is no-- in the IEA's projections, there's no drop off in the amount of hydrocarbons that we're going to be using in by 2050. It's a lesser amount in the overall mix percentage wise, but actually it's an increase-- there's going to be an increase in hydrocarbon utilization overall.
So, it's more of everything, I think is what we're likely to see between in the coming decades between now and 2050. And I think the hope is we're going to see a much higher percentage of greener technologies being utilized less carbon intensive technologies. But I think every technology is going to be contributing more.
BILL CREEDON: So, let's go to our world on for risk, for protection, for insurance. So, in construction, for the construction projects and especially around renewables, we're seeing a market that's really transitioning towards more of what people would use the term softening in pricing and also being open to broader coverages.
It's certainly-- it's helped create more capacity above that. Give us a sense on, we go through and I'm going to a follow up question with you on construction transitioning to operational. But on the operational side, are you seeing some of the same around the marketplace?
RUPERT MACKENZIE: Yes. I mean, so we're certainly seeing broadly a softening across the natural resources market. Results have been pretty good over the last couple of years. And that's driving a very competitive environment.
There's been some losses this year, particularly in the downstream energy side of our business. And we've seen some narrative coming out of insurers hoping that that's going to change the market dynamics and possibly slow down some of the softening that we're seeing.
But I would argue that we're at a place in the market cycle where there's an inevitability around terms getting better for buyers and pricing getting better for buyers. Barring some significant event of considerable magnitude, I don't see market conditions really changing.
And we're seeing that from how the insurers are responding at the moment. I think they're increasingly concerned about market share. They're increasingly looking to secure the best possible positioning on accounts at the moment.
And that in itself is driving competitive competition. And it is assisting in that market softening. My personal view is once we get through the first quarter of this year, we're likely to see the softening in the market accelerating, barring any major events.
BILL CREEDON: Well, no one wants to miss this leading edge of opportunity at the same time.
RUPERT MACKENZIE: Exactly.
BILL CREEDON: I'm going to talk a little bit about construction. When we look at a construction project and I know I've seen this in other industries, but we Willis, we really look at the full life cycle.
And we look at, like I said earlier, the design. We look through the construction phase. We are even looking at making certain that coverage just goes into the first year or two of operational. Why is that common? I know it's been pretty common in your space. Expand a little bit why that's important?
RUPERT MACKENZIE: Absolutely. I mean, so that handover period when a risk is coming off construction and going into testing and then going on into full blown operating is the pivotal-- is a pivotal moment in terms of risk.
And it's a period where we often see losses arising as things don't quite work in the way that they were designed to work. And the testing either exposes that or initial operation generates some event.
From an insurance perspective, It's a moment where whoever is working with that client and intermediating that risk really needs to ensure that there is clarity as to who is the risk taker, where that risk has been transferred to, what that coverage is, has all of the conditions of the policy been adhered to? Do all the parties have total clarity as to where issues are? Who is the owner? Who is the ultimate taker of potential risk.
Because it can at times. You and I have seen it many, many times over our careers. There can be debate as to whether a risk and an event falls back onto the construction policy or into the operational policy and so providing a client with a seamless transition between those two periods in a project lifecycle is absolutely critical.
And I think the more that we, as two parts of the business can do to work together to ensure that seamless transition from the construction phase into the ongoing operational phase, the better it is.
And oftentimes these things, events fall between those two products. And it's a messy experience for clients and one that we as brokers whether construction brokers or operational brokers, absolutely want to avoid.
BILL CREEDON: Yeah, it's something we've seen on a lot of it. And it is. It's complicated at the startup. I mean, that's when you could have it's when you're going to see claims and it's why it's so important. I do want to stress the same. I mean, we're looking at it as Willis.
For the client, it's the whole life cycle. We're not we're not worried about where these are being done. We're just going to make certain that the client has a product that's extremely responsive, regardless of where in the process. Let's get a few years into the project and then we'll make certain that we go into then a normal operational side.
Rupert, we've gone through a lot. And you've talked about some of the things that we're seeing in the very near term, what are those things on the horizon that are going to fit into the renewables area, that are going to become the next thing for us to be looking at evaluating risk?
RUPERT MACKENZIE: I mean, Bill, there's a lot of very exciting technologies out there which are being developed and people are working extremely hard to perfect. I think a lot will depend on ultimately whether those technologies work, whether it be-- we've all seen the advances that have been made in Fusion technology being one example still a huge way to go in terms of actually ultimately delivering something that is going to be a viable, reliable energy source. But some very exciting developments.
I would suggest hydrogen is another exciting area we've seen, and we're beginning to see being built some really exciting pilot plants to look at whether green hydrogen, i.e. hydrogen that is being produced from solar.
So, using solar power to fuel electrolysers that go into producing hydrogen, with that hydrogen being then used to either produce ammonia or to directly produce electricity and power.
Theoretically, that technology works and it should produce very green electricity. I think there's some challenge as to whether or not the economics are going to work out in the long term, particularly at a world scale and industrial scale.
But it's exciting. And I think if we look at some of those renewable technologies, we've recently done a clean energy survey of 400 different companies and there's a clear focus around things like carbon capture, solar, and wind in the near term, but an ambition around developing technologies such as hydrogen in the medium to longer term, that and also geothermal as in perfecting some of the technologies around geothermal in the longer term.
So, I think there's a ton of technological advancement that is going to be required to fuel the transition. But there's a ton of exciting work being done by researchers and developers around the world to support the transition.
BILL CREEDON: So, let's take that into the insurance industry. A lot's going on in the industry itself to meet the demands, meet what's coming up in front of us. How is our industry responding? Are you seeing innovation in some of our products that are going to respond to this evolving risk platform?
RUPERT MACKENZIE: I think to a certain extent, yes. But I do think we've got to, as an industry, look to ensure that we are keeping abreast with the risks as they develop. I mean, I think one of the challenges for many buyers, the energy industry used to be an incredibly siloed.
So, if you were in the hydrocarbon sector, that's really what one did. And if you were in the power generating sector, that's what one did. We're beginning to see a real blurring in the lines of who's doing what with many of the larger investors in renewable projects coming out of the hydrocarbon sector.
And one of the challenges I think we face is that there is no product out there that packages all of a company's risk efficiently. I mean, if you go to an insurer and say, yes, we've got some traditional hydrocarbon assets, but we've also got a huge investment in wind and solar, you're going to be told to talk to two or three different groups of underwriters with two to three different strategies.
And I think one of the things I would like to see is a much more holistic approach to product than we currently see. Rather than clients having to effectively buy three or four different product lines, I think there's an efficiency that we can help drive where we can come up with a multi-dimensional product that caters for all aspects of a client's asset mix.
BILL CREEDON: And we're seeing that even in our own structure on trying to create dedicated teams that have construction, they have 100%, and we're going to put that into in front of the client as no worries, you've got this covered from start to finish.
RUPERT MACKENZIE: Exactly and I think it makes sense. And I think that synergy between what your team are doing in construction and what my group are doing around the natural resources industry, it's reflected in how many of the markets are now approaching the renewables renewable side. And so, I think aligning ourselves in a way to best support the clients is going to be the key to success for all of us.
BILL CREEDON: Really exciting. Coming down here to the end, I want to go maybe a little bit around politics.
RUPERT MACKENZIE: Yes. Which we can't avoid politics at the moment.
BILL CREEDON: We can't right now. But I think renewables seem to be not a lightning rod, but more. It's certainly a polarizing topic around the world. Do you see local governments or entities around the world that has a big impact on the business of renewables and where construction is going to happen? Development. How do you see that happening around the world and any examples you'd cite?
RUPERT MACKENZIE: First and foremost, I think it is an emotive and a hot topic in many geographies. And I would argue that we are-- you are possibly going to see some polarization in terms of the implementation of renewable energy strategies and with certain geographies possibly tempering.
I'm not going to say anybody's going to withdraw. I don't think we're going to see that, but I think we're possibly going to see some tempering of ambition in certain geographies. And an acceleration, possibly in other geographies who are going to go all in.
And I think much will depend on the geographic location. The potential upside that renewables might bring to a specific country. Are they best placed? If you're in a very hot, sunny country where solar is absolutely going to provide reliable power 365 days a year, then clearly there's an opportunity there.
But we are going to see, I suggest, a slightly more measured approach to renewables than possibly we've seen over the last five to seven years where we have been pursuing, I would suggest, a renewable strategy at any cost, possibly with governments and project developers have been looking at renewable projects in areas of the world that may not be wholly suited to those projects.
I mean, I think there seems to be a slightly different narrative at a government level and a global level now, and I would argue, possibly a slightly more logical and sensible narrative about the real true applicability of some of these projects and making sure that investors and governments are going to get the right level of return, the expected level of return that these projects should bring.
I don't believe that we're going to see any withdrawal from renewables. I don't see whether it be in the Middle East or whether it's in the US, both of which are areas with considerable hydrocarbon reserves.
And if you look at comments coming out of Saudi Arabia over the last year who said that they were going to look to monetize every hydrocarbon molecule. Do I think that's at odds with their plans around renewables? No, I don't. I think they're going to be continuing to develop renewable projects alongside continuing to monetize the potential wealth that they have in hydrocarbons.
And the same in the US, we touched briefly just before this podcast started about President Trump's clear support around the hydrocarbon industry in the USA. I don't think we should see that as a withdrawal from the renewable industry far from it.
BILL CREEDON: I want to hit one more thing before one last point before we close.
RUPERT MACKENZIE: Sure.
BILL CREEDON: In the construction side, with any cat exposed and catastrophic exposure, whether it be hail or whatever, you're seeing some of the companies look for alternative risk transfer products. Are you seeing that in the operational phase and more so now than in prior years?
RUPERT MACKENZIE: Yes we are. And I think a lot of that's been led with this shift in the energy ecosystem. So we are seeing projects being built in areas where historically there haven't been world scale assets being built out. And with that comes a different level of risk.
And oftentimes I think we're seeing companies look at things like parametrics and other potential products that can help them manage the different cat exposures. And I think certainly, what we've seen on the operational side and I'm sure it's the same on the construction, that as more and more companies are looking at alternative risk transfer products.
Those products are getting better designed. There's better data to support them. And the pricing around those products are making them more and more attractive. I don't see them necessarily replacing traditional insurance products, which still are incredibly cost effective way of taking risk off balance sheet and transferring them.
But I do believe that there is an absolutely a place for whether it be parametric tools or bonds, that can add really useful tools to risk managers armories, as they're thinking about how best to take risk off balance sheet and to transfer it to different capital providers.
BILL CREEDON: Thank you. Well, Rupert, unfortunately, that's going to end this edition of our Blueprints podcast. And a really good discussion. Thank you for joining.
RUPERT MACKENZIE: Bill, Thank you so much. It's been great. I look forward to continuing our ongoing discussion around how construction and natural resources can really work together. We've got an exciting few decades ahead of us, I think, in all sectors of energy production and to realize our ambitions in that It's going to require us to work hand in glove with you and your team in construction to make that a success.
BILL CREEDON: Wonderful. And thanks, everybody, for joining us today.
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