DEEP DIVE
Key Finding #2
There is a gap between the urgent desire to advance the transition and the logistical reality of meeting net zero targets
As the intersection of corporate strategy and climate-related concerns is becoming more prominent, the data reveals a disconnect between the pressing need to achieve net zero goals and the reality on the ground. While 41% of respondents report feeling “very prepared” to respond to the growing urgency and demands of the energy transition from a business strategy perspective, a majority (55%) acknowledge they are falling short of these demands and feel only “somewhat prepared”, while 4% feel “not too prepared”. This lack of confidence implies a gap in readiness and underscores that there is still some way to go before businesses feel prepared to act decisively.
Investment Priorities
Despite this gap, energy producers and industrial energy buyers are making critical investments in energy transition technologies in hopes of meeting their net zero goals. Solar technology emerges as the most common investment area across markets, with UK respondents more frequently reporting investments (63%) than those in the US (54%).
The optimism surrounding solar reflects its comparatively low barriers to entry, including decreasing costs, scalability, relative ease of deployment, and lower capital expenditure requirements when compared to wind.
Battery storage solutions are the next most common reported investment area in both markets (35% UK, 38% US), which can enhance reliability and mitigate the intermittent nature of renewable sources like solar and wind. Likewise, smart grid technology and modernization follows as another frequent investment in both markets (31% UK, 36% US), indicating that stakeholders recognize the importance of infrastructure updates in generating more capacity.
Fewer respondents report investments in wind technology in the UK and US, which reflects the struggles wind has faced in recent years compared to solar because of the wider economic environment. Offshore wind is particularly sensitive to interest rate rises and cost inflation compared to other types of renewable energy because of higher upfront investment and financing costs as well as longer return on investment (ROI).
While offshore wind developers in both countries are facing challenges, more UK respondents (20%) reported investments than US respondents (14%). This speaks to the maturity of the offshore wind industry in the UK, which was supported by consecutive governments in the 2000s and 2010s, elevating the UK to be the largest offshore wind market in the world behind China.
“Furthermore, it’s important to differentiate between onshore wind in the US, which has been around for several decades, and offshore wind. Even though offshore wind is in its nascent stages, this technology still holds immense potential for the US market. The opening of the first large-scale offshore wind farm in the US in March 2024 and financial support through the Inflation Reduction Act could serve as boons for increased development and investment following the cancellation of several projects due to high inflation, supply chain challenges, and the rising cost of capital.”
Jamie Fleming, Head of Offshore Energy at AXIS
Investment Drivers
When respondents were asked about the most important driver of their company’s strategy for investing in renewable energy technology, the data reveals varying motivations for each research audience and market.
Energy security and reducing reliance on fossil fuels drives energy producers in both the UK (20%) and US (17%), pointing to a shared recognition of the importance of transitioning away from fossil fuels to both limit environmental impacts and ensure long-term energy stability.
Shared commitments to sustainability and environmental responsibility drive both energy producers and industrial energy buyers in the UK. Industrial energy buyers are most commonly motivated by ESG goals and commitments (21%), which is also the second most frequently cited driver among UK energy producers (16%), highlighting the collective efforts being made towards a more sustainable energy future in the UK. “The emphasis on collective action to address the climate crisis is quite strong in the UK,” notes Richard Carroll, Global Head of Energy Resilience at AXIS. “This is something we don’t see as prominently in the US. ESG has become a polarized issue in the US which could be deterring energy stakeholders from positioning ESG goals as being a core driver of investment."
Industrial energy buyers in the US are driven by innovation and technological leadership. The data reveals that demonstrating innovation and technological leadership is the most commonly cited driver for industrial energy buyers in the US (22%). Market growth opportunities (13%) and cost savings and price predictability (13%) are the next most frequently mentioned investment drivers, reflecting a focus on embracing innovation and capitalizing on the expanding renewable energy market.
Investment Barriers
While the commitment to energy transition technologies is clear, businesses face significant challenges that prevent them from increasing their investments, with economic and financing concerns among those most frequently reported by respondents.
More specifically, the high capital investments required for projects (35%) and global economic conditions (33%) emerge as commonly cited barriers among energy producers and industrial energy buyers in both markets, highlighting the financing complexities often faced by businesses when navigating projects.
Furthermore, both energy producers and industrial energy buyers in the UK, as well as industrial energy buyers in the US, frequently pointed to infrastructure challenges as another barrier (36% among UK energy producers, 33% among UK industrial energy buyers, 34% among US industrial energy buyers), highlighting the challenges that both groups face as infrastructure lags behind technological innovation. Technological risks emerge as another commonly faced challenge among US industrial energy buyers, reflecting concerns surrounding the reliability and performance of emerging renewable energy technologies in meeting their energy demands. Energy producers in the US also report facing challenges related to existing energy contracts, which can limit their ability to transition to renewable energy sources.
While not the primary obstacles, there are statistically significant differences in the survey data between investment barriers being faced in the UK and US. Notably, energy producers in the UK cite uncertainties around ROI (31%) significantly more than those in the US (19%), which points to a concern regarding the financial viability and profitability of investments being made. The UK’s recent lag in renewable energy investments compared to global averages suggests this concern may be tied to a lack of cohesive government policy to make investments more attractive to global investors. This aligns with a key finding of this report on respondents' interest in more financial support from the government to accelerate the energy transition. Insurers also have a role to play in alleviating concerns around ROI by providing access to historical performance data and offering risk mitigation strategies to help investors and project stakeholders make more informed investment decisions.
On the other hand, energy producers in the US view grid reliability as a challenge limiting their investments (28%) significantly more than those in the UK (20%). This highlights dependability and resilience concerns around the infrastructure needed to support their investments in the US and points to the need for accelerated modernization efforts to prevent further investment impediments.
“The high capital expenditure requirements and upfront financing associated with renewable energy projects like wind were manageable when interest rates were low. However, changing global economic conditions, rising interest rates, and inflation have significantly impacted the renewable energy sector due to its specific financing structures, making it more challenging for businesses to invest in these projects.”
Peter Fitzsimmons, Head of Onshore at AXIS
The Challenges with Nascent Technology
As urgency around the energy transition intensifies, technologies such as carbon capture and storage (CCS) and green hydrogen production hold immense potential. However, survey results reveal these technologies face even greater challenges in securing investments for large-scale deployment.
Economic costs and ability to secure financing were cited by energy producers as primary obstacles (40%) for further investment in prototypical technologies.
The capital-intensive nature of these technologies, coupled with the lack of proven technological ROI (another obstacle for investment in prototypical technologies, cited by 33% of energy producers), makes it even more difficult for businesses to secure the necessary financial support. However, the development of cohesive public policy that offers meaningful financial support for nascent technologies, such as the Inflation Reduction Act in the US, may over time impact the perceptions of respondents who referred to a lack of adequate financial incentives and tax credits (30% of energy producers) as another barrier to these technologies realizing their potential.
Financial support isn’t their only concern when investing in newer technologies. Businesses hesitate to invest significant resources in breakthrough technologies that are often accompanied by unknown risks (28% of energy producers cited this as a concern).
However, insurers can help address this element of uncertainty by applying lessons learned when writing insurance policies for technologies that were once nascent, such as lithium-ion battery energy storage systems. A recent report published by the Geneva Association1 highlights the key role insurers must play in supporting new technology for expediting industrial decarbonization and offers a novel “Insurability Readiness Framework” (IRF) developed through cross-sectoral collaboration. The IRF was developed to enable more informed conversations between climate technology stakeholders and re/insurers from the early stages of a project to ensure that risks are considered, mitigation strategies are developed in line with insurance expectations, and to help pinpoint areas within climate tech projects that pose the greatest challenge to insurability. The IRF could provide a clear roadmap to project developers early in the project lifecycle on what further risk reductions may be required to ensure they achieve the level of cover expected by investors and lenders alike. Furthermore, many energy producers feel they lack the operational expertise needed to effectively implement and manage these new technologies (36%). “The success of the energy transition will also heavily rely on a skilled workforce that can build and maintain the clean energy infrastructure,” says Dan Stevens, Head of Renewable Energy Engineering at AXIS. “By outlining their expectations for best practice in design, risk management, and operational practice, insurers can help drive that up-skilling.”
1The Geneva Association 2024. “Bringing Climate Tech to Market: The powerful role of insurance,” by Maryam Golnaraghi, et. Al. https://www.genevaassociation.org/sites/default/files/2024-04/climate_tech_2_report_090424_web_.pdf
