Parametric insurance is emerging as a key solution to the financial challenges facing Africa's energy sector. By increasing investment certainty and facilitating financial flows, this approach offers comprehensive protection against a multitude of risks. This is a major opportunity to accelerate the development of renewable energies in Africa by securing investments and ensuring the financial stability that is essential for players in the energy sector.
The energy and electricity markets in Africa are experiencing significant growth, particularly in terms of the development of installed renewable energy capacity. According to the International Energy Agency (IEA), demand for electricity in Africa is set to triple by 2030. In 2019, the electrification rate in sub-Saharan Africa was 46%, leaving 570 million people without access to electricity, underlining the need for new sources of energy. To meet this growing demand, Africa is increasingly turning to renewable energies, where growth in production capacity is widespread and accelerating. The African market for photovoltaic solar cells, for example, is expected to grow at a compound annual growth rate of 30% between 2023 and 2029.
One of the main challenges in attracting international capital and investment to Africa’s energy sector is the perception of risk associated with it. Potential investors, including new entrants and international players, often view the sector as volatile due to factors such as political instability, inadequate public infrastructure and regulatory uncertainties. These concerns hinder the inflow of investment and require strategies to mitigate risk and attract capital.
Mitigating the economic consequences of global warming
Parametric insurance offers solutions to these challenges by enhancing investment certainty and facilitating cash flow, while protecting against the widest range of risks. Direct protection can be offered to power generators and infrastructure facilitators using data from critical factors such as solar irradiation levels and wind thresholds. Also, the availability of customised insurance cover alleviates investor fears by protecting electricity producers and buyers from the negative fiscal impacts associated with various market risks and price volatility.
When specific conditions are triggered, prompt compensation is provided – offering a faster claims settlement process than traditional insurance models, enhancing transparency and ensuring minimal disruption to cash flows.
Africa Specialty Risks is now working with partners in the photovoltaic sector to offer an innovative new cover designed to protect Independent Power Producers (IPPs) against the volatility of electricity prices on the Day-Ahead Market (DAM) in the power pools to which they sell their electricity. This cover, tailored to the renewable energy segment, will help investors reduce the risks associated with their investments in solar power generation infrastructure in Africa, thereby attracting capital to the continent and accelerating the expansion of the renewable energy industry.
A number of projects are also underway to protect and encourage investment in the renewable energy sector in Africa. A project currently underway will provide off-takers with greater liquidity resilience in the face of market risks, enabling them to offer greater confidence to their IPP partners and suppliers. These innovative solutions will enable off-takers to strengthen their relationships with power generators, who in turn will benefit from the increased certainty that their power purchase agreements can be honoured in full, regardless of fluctuations in market electricity prices.
Parametric insurance will play a key role in the search for sustainable and environmentally friendly energy solutions in Africa by providing customised cover specifically designed for renewable energy installations and low carbon operations.
As Africa strives for greater energy independence and universal access to electricity, parametric solutions will be invaluable in helping to propel the continent towards a renewable energy future.
High-impact sustainable growth
As the energy and electricity market in Africa evolves rapidly, parametric insurance is becoming increasingly important. Africa has a significant share of the world’s sustainable energy resources, including the world’s largest solar potential, representing a huge opportunity for growth in the renewable energy sector. This growth can stimulate economic development, improve access to energy and help mitigate the effects of climate change.
The expansion of the energy and electricity market in Africa also brings with it opportunities for job creation, technology transfer and local capacity building. The development of renewable energy projects requires a skilled workforce and new grid infrastructure, providing employment opportunities for local communities. The growth of Africa’s renewable energy sector can contribute to the continent’s energy security and reduce dependence on imported fossil fuels. By harnessing Africa’s abundant renewable resources, countries can increase their energy self-sufficiency and reduce the vulnerability associated with fluctuating fuel prices and supply disruptions.
Through the joint efforts of insurers, investors, power producers and government organisations, Africa can take full advantage of its renewable energy potential and foster a sustainable and resilient future.
About Raveem Ismail
Raveem Ismail is Head of Parametric Business at Africa Specialty Risks. He has over ten years’ experience in underwriting, risk analysis and modelling.
Prior to joining ASR, Raveem was Chief Underwriting Officer and CEO of QOMPLX:UNDERWRITING, a UK MGA where he launched the first parametric multi-risk cyber and terrorism insurance product designed for small and medium sized businesses and backed by Chaucer. Raveem will take this highly innovative account forward, building on a career marked by extensive industry experience and market contacts, with his previous product winning the National Insurance Award (2021).
Born in the UK, Raveem is a triple graduate of Oxford University, where he obtained a PhD in atmospheric, oceanic and planetary physics. He chaired the Reinsurance Special Interest Group for the EU COST Action IS1304 on Structured Expert Judgement.