Power Up: Growth Opportunities in Renewable Energy

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Text, Wednesdays With Woodward (registered trademark) Webinar Series

Joan Woodward in a video window in the upper right corner.

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JOAN WOODWARD: Good afternoon and thank you for joining us. I'm Joan Woodward and honored to lead the Travelers Institute, which, as you know, is the public policy division and educational arm of Travelers. Welcome again to Wednesdays with Woodward, a webinar series we created to convene leading experts for conversations around today's trickiest problems and other items you're dealing with with the pandemic. So, before we get started, I'd like to share the disclaimer about today's program.

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Text, about Travelers Institute (registered trademark) Webinars. The Wednesdays With Woodward educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisers about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate.

The partner logos below text, Power Up: Growth Opportunities in Renewable Energy

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And a big thanks to all of our partners who help make these programs possible, the American Property Casualty Insurance Association, the MetroHartford Alliance, the Connecticut Business and Industry Association, and Arevon, and Rosendin Renewable Energy Group, both of whom have represented us, joining us today on this great panel. So today, we're talking about renewable energy, a rapidly growing industry, as we all know, an important one.

As we'll hear from our speakers today, the renewable energy sector is expected to draw significant, if not most of the investment in the energy sector over the next 30 years. And really thanks to advancements in technology, the growth opportunities in this sector really do abound. So here today to help us understand and really break down the state of the renewable energy market and how your business can take advantage of these growth opportunities, we have three leading experts.

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Photos and text, Speakers. Joan Woodward, Executive Vice President, Public Policy; President, Travelers Institute; Travelers. Eileen Kauffman, Vice President & Global Practice Leader, Renewable Energy, Construction Energy Marine, Travelers. Justin Johnson, Executive Vice President & Chief Operating Officer, Arevon. Duncan Frederick, Vice President, Business Development, Rosendin Renewable Energy Group.

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First, Justin Johnson comes to us from Arevon, where he serves as the Executive Vice President and Chief Operating Officer. Justin is also one of the founders of Arevon. One of the largest renewable energy asset managers in the United States, bringing with him more than 20 years in the energy and operations experience field. As we'll hear, they develop, own, and operate renewable energy facilities serving utilities and corporations. As COO, Justin is responsible for all development, construction, and operation activities. Welcome, Justin. Thanks for being here.

Next, we have Duncan Frederick, Vice President of Business Development of Rosendin Renewable Energy Group, a division of Rosendin Electric, the largest employee-owned electrical services contractor in North America. Duncan brings more than 30 years’ experience in the energy conservation and renewable energy industries, and currently focuses on the development and engineering, procurement and construction, or EPC, you're going to hear a lot of EPC today, delivery for these renewable projects at the company.

Finally, we have our own Eileen Kauffman, my friend, Vice President and Global Practice Leader for Renewable Energy at Travelers. Eileen has extensive risk management experience, including more than 25 years in commercial property and casualty underwriting. She's really a recognized leader in the renewable energy specialist and leads Travelers' growth in these areas, with teams spanning in the United States and throughout Europe. So, Duncan, Justin, and Eileen, thank you all so much for joining us.

To begin the conversation, I'm going to ask each of our speakers to provide really a brief overview and level set for all of us of their companies and their activities in this space. And then we'll bring everyone back together for a conversation, and then, of course, take your questions. So, make sure you put your questions in the Q&A feature. And we'll try to get to as many as we can. So, with that, Eileen, I'm going to turn the virtual stage over to you. And kick us off with really an overview and an introduction to the renewable energy marketplace.

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Kauffman in the video window in the upper right corner. Text, Renewable Energy, Eileen R Kauffman, March 2, 2022

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EILEEN KAUFFMAN: Thanks, Joan. As Joan mentioned, it's no secret to any of you that the demand of renewable energy continues to grow rapidly.

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A chart illustrates the History of Global Energy Consumption. It depicts the 1995 and 2010 growth, and projected growth in 2025 and 2040.

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As the pressure to demonstrate ESG credentials continues to grow in all industry sectors, businesses and consumers are turning to solar, wind, and clean sources of energy production. As you can see on the graph, over the next 10 years alone, the growth in the energy market has skyrocketed with an increase in approximately 240% between 2010 and 2020, making it a promising market for the investment community in the U.S. and around the world.

And renewables play a large part in that promising market. Over the next 30 years, the expected investment in new power generation is estimated to be around $13 trillion, with 77% to be invested in renewables alone. Moving on.

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Renewable Energy: A Story of Growth. +60% Renewable electricity capacity increase through 2026. +17% Increased capacity additions of solar PV forecasted for 2021. 3 times Global offshore wind capacity by 2026.

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In fact, the growth of renewable capacity is forecasted to accelerate in the next four to five years and will account for almost 95% of the increase in global power capacity through 2026. Even with post-COVID surging commodity prices, increasing manufacturing costs for solar PV, the solar capacity additions in 2021 achieved a 17% growth.

And emerging technologies are expanding. Battery energy storage is expected to expand by 56% in the next five years. The main driver for this expansion is the increasing need for system flexibility and storage globally to fully utilize and integrate variable renewable energy into the power systems. Finally, a leading indicator of U.S. growth in this market is the legislative efforts at the federal level. Even mentioned last night during the President's State of the Union, aim for investments and subsidies to reach $2 trillion by 2035. These funds will be directed to projects and strategies designed to significantly reduce carbon emissions.

So that's all the good news. But we all know that with growth and opportunities come greater risk and responsibilities. From site development, contract negotiations, and design build through claim resolutions, there are many risks associated with renewable energy projects. And renewable energy stakeholders are seeking ways to mitigate these risks and protect their interests. Agents, brokers, and insureds must be ready with the experience, expertise, tools, and resources to step up to what is an evolving and complex need. Moving on.

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Photos and text, Renewable Energy Sectors. Solar Energy, Wind Energy, Hydro Energy, Battery Energy Storage, Biomass Energy

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The complexity and need differ depending on the various sectors of renewable energy. Insurers who are currently in the renewable energy industry, like Travelers, have specialized product offerings tailored to the sectors mentioned here. Adding a layer of complexity, the renewable energy space is an interesting one because the insurers work with both the investors in this market and businesses who own, operate, and develop renewable energy projects, such as Arevon and Rosendin. The customers can be global companies that operate offshore wind farms in the north seas in Europe, or along the eastern seaboard in the U.S.

They can be asset management companies who manage large portfolios of solar assets all over the world. No matter who they are, their insurance needs are incredibly specific. And those specific needs, such as site development, installation of a wind turbine, to the operation of power-generating solar farms, come with a desire to work with an insurance company that has the deep expertise, industry knowledge, and experience working in the global markets. Moving on.

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Renewable energy trends. Total investments in the energy transition total $755B in 2021 - a new record. Through mid-October 2021, states enacted more than 70 renewable energy and climate related policies. 45% of the public is willing to pay a higher utility bill in order to achieve 100% renewable energy. In May 2019, a Texas hailstorm resulted in the largest weather-related single-project loss. More than 400k of 685k cell modules were damaged or destroyed and losses totaled $70M.

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So, in the big picture of the growth of renewable energy, some of the trends we see, like the global investments and energy transition, hit a new record in 2021. And $366 billion of that $755 billion shown there was for renewable energy alone. In the U.S. many states have created their own goals and objectives for carbon-free energy generation and consumption over the next decade. And individuals globally are willing to pay higher utility bills to achieve 100% renewable, looking to reach that net-zero emissions goal post.

As I mentioned previously, with growth opportunity comes risk. And weather-related catastrophes continue to be a challenge to consider, like the hailstorm in Texas which resulted in the largest single solar project hail loss in the industry, with losses totaling around $70 million. We will be discussing several of these trends throughout this webinar. Now, I'll turn it over to Justin.

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Johnson in the video window in the upper right corner. Text, Speaker. Justin Johnson, Executive Vice President and Chief Operating Officer Arevon

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JUSTIN JOHNSON: My name is Justin Johnson, and I am the COO of Arevon. Arevon operates about 4,000 megawatts of solar and wind assets throughout the U.S. And we have a growing fleet of operating battery storage plants as well, with three battery storage plants in operation and then a fourth one that will be entering operation shortly. I think there's a lot of macroeconomic challenges that every industry is dealing with now with inflation, logistics, geopolitical disturbances and challenges. But on the whole, I think the outlook for renewable energy is as good as it's ever been.

From some of the stuff that Eileen just presented and just the way that the technology and the costs are progressing,

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Johnson shares the screen with Woodward and Duncan Frederick.

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I'm incredibly bullish on renewables future and the ever-increasing part it's going to have in our--the levelized cost of solar remains among the lowest of any energy source. And the same is true for wind in many areas. And that means that more and more customers are signing up to buy power from companies like Arevon. Storage is an increasing piece of that puzzle.

As penetration levels of renewables increase, it becomes more and more important to have storage in the mix to ensure that you can provide power to your customers when the sun isn't shining, or the wind isn't blowing. And I think that's also a very--I have a lot of optimism there because of the progress being made with electric vehicles and how we're able to translate that to power generation and build power plants with the same battery cells that Tesla is using to build their cars, for example.

So, I think just on the whole, I remain convinced that a lot of the challenges that we're seeing now are temporary. And it's kind of economy wide. And the renewables industry will persevere. And there's just going to be a ton of growth in the future. I'd like to turn it over to Duncan for his intro remarks.

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Frederick in the video window in the upper right corner. On screen text provides the overview of Rosendin Electric, Inc.

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DUNCAN FREDERICK: Great. Thank you, Justin. And thanks to Joan and the Travelers Institute for the opportunity to participate in this webinar. So just a quick overview of Rosendin, formerly known as Rosendin Electric. We're the largest employee-owned electrical contractor in the U.S. with over 7,000 employees. We've been in business for over 100 years, servicing most major markets in the Western states, Texas, and the mid-Atlantic.

And we provide the full spectrum of electrical high-voltage, medium-voltage, low-voltage control solutions for most major vertical markets, including, but not limited to, large commercial, industrial, entertainment, data centers, transportation, health care, and, of course, renewable energy. Moving on.
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Rosendin Renewable Energy Group. Formed in 2009 as a separate operating region. Now accounts for over ⅓ of Rosendin total revenues. Full service EPC for utility-scale PV and BESS project. Design-build electrical service provider for wind farms. Over a 4GW of EPC solar PV work across Western States, Texas and the Mid-Atlantic. Over 25GW of substation and collection system work on wind farms throughout the country. Top 5 utility-scale PV/BESS EPCs in the county.

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Now, the distinction with Rosendin Renewable Energy Group is that our role in renewable energy is that we function as a turnkey general contractor, an EPC for large-scale solar projects, while still performing as a design build subcontractor in all other vertical markets.

Back in 2009 when I joined Rosendin, we took what was a wind-focused substation and collection system subcontractor division and created a separate region now focusing on solar EPC utility scale PV and battery storage. Over the past six years, we've installed over five gig of utility scale solar primarily Western states, Texas, and a little bit in the mid-Atlantic, and over some 25 gigawatts of wind electrical projects all throughout the U.S. Moving on.

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Charts illustrate a 5 - 10 Year Outlook. Utility Scale Solar, Wind, Battery Storage.

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So, let's see here. And now for the company snapshot. I've been asked to provide a quick overview of how we see the renewable energy market developing over the next 5 to 10 years.

So, over these next few slides, I'll be speaking not just to the very positive prospects for the renewable energy industry, which certainly we've heard from Eileen, but to some of the short to mid-term challenges that we're facing. So, looking at this first slide, these Wood Mackenzie graphics paint a very rosy picture for the three major sectors of the renewable energy space: utility scale solar, utility scale wind, and battery storage across all sectors.

While there are differing opinions on just how robust growth will be over the next decade, we believe utility solar and wind, assuming the likely extension of the ITC and PTC incentives, will post healthy growth rates averaging between 15% to 20% compounded annual growth rates. And with battery storage, growth is basically off the charts. That's going to be tracking, we think, even higher than utility scale solar and wind. Moving on.

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A color-coded map of the United States. Text, Drivers for Growth: Commercial, Regulatory & Legislative. Renewable & Clean Energy Standards.

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So, talking about what's driving this growth.

Historical growth rates and certainly what we're anticipating for the future is underwritten by solid fundamental market drivers, regulatory, legislative, and commercial. This slide, although a little old, does a good job at illustrating the predominance of states that have implemented various levels of renewable portfolio standards and goals, along with many states implementing clean energy standards and goals. So, add this to the existing and, we hope, likely extension of the ITC, PTC, and potential implementation of standalone best ITC, you have a compelling regulatory and legislative platform pushing accelerated adoption of renewable energy. Moving on.

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Levelized Cost of Energy (LCOE) By Source. Graphics and text compare 2009 to 2020. The price of electricity is now as low as ever, why is this? Renewable energy has become increasingly cost competitive as a result of falling installed system costs associated with more efficient energy conversion Technologies, increasingly efficient manufacturing and most cost-effective means and methods.

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1. But the biggest driver mentioned earlier, I think both Eileen and Justin mentioned, is the commercial fact that the cost of renewable energy power, particularly wind and solar, has been and will continue to be the least expensive source of energy. Levelized cost of energy, LCOE, for solar is now dropping well below $35 a megawatt hour. Most of this drop in cost is attributed to the historical significant year-over-year drop in module costs, drop in racking, inverter, and balancing system costs.

Historically, it's been a 5% to 10% year-over-year drop in cost consistently. That is up until, unfortunately, now. So, there's more to come on that. Moving on.

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2022-2025 Projects: Pipeline: Solar & BESS. Two maps of the United States. On one, green dots represent solar projects. On the other, red dots represent BESS projects.

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Just to put things in perspective, though, where rubber meets the road, this slide outlines roughly how many projects are currently in various stages of development in the utility scale PV and BESS marks. Out of a total pool of over 4,000 PV and over 2,000 BESS projects in various stages of development, we are, at Rosendin, at any given time evaluating over 300 opportunities for future engagement.

It has been a crazy busy time for EPCs. We booked out our capacity for 2022 and 2023 and are now focusing on project pipelines for 2024 and 2025. And this just isn't Rosendin. Most all tier-one utility scale EPCs are in similar positions. So, for the first time in my career in the construction side of the business, bankable tier-one EPC contractors are in high demand and short supply. It's not a bad place to be. OK, moving on.

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Two bar charts reflect data for 2022, 2023, 2024 and 2025. Text, PV + BESS Projects By State Up Until 2025

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This is kind of interesting here. It's also showing a shift that's occurring where the markets are right now in the U.S. It's no longer western-centric. Certainly, California, Nevada, Arizona, and Oregon, to an extent, are still very, very busy. But if you look at the top part of that graphic, now it's states like Texas, Pennsylvania, Ohio, Indiana, Michigan, et cetera. So as a tier-one EPC, you need to be nimble to track and enter these new renewable energy markets if you want to continue to grow. Ok, moving on.

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A graph and a bar chart. Text, Challenges: Commodity, Shipping & Logistics Cost Increases. BOS Cost Trends. PV Solar Costs

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Challenges. I mentioned earlier about solar costs. We're all aware of what's happening with supply chain constraints and commodity pricing. Well, for the first time in years, overall balance of system costs have increased significantly going into 2021 and will likely remain high through 2022. And as you can imagine, this puts tremendous pressure on developers, owners, and EPCs to do whatever is possible to meet investor return requirements against fixed power purchase agreements that do not take into account recent impacts on costs.

At best, these many projects remain on schedule, but require innovative approaches to squeezing costs and efficiencies wherever possible. And at worst, we're seeing more and more projects being pushed out and canceled. This is a big challenge for those of us EPCs who've committed capacity, only to have projects push out or cancelled. And then all of a sudden, you're scrambling to fill that near-term capacity. Ok, moving on.

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Market Impact Drivers – Tracking. Federal and State Legislation. Withhold Release Order Hoshine Poly-Si. Uyghur Forced Labor Prevention Act. Anti-Circumvention Petition. Build Back Better Act: Climate Change. America COMPETES (Creating Opportunities for Manufacturing, Preeminence in Technology and Economic Strength Act)

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So, I'm like, you're running out of time here. So, I won't do a deep dive into these next three slides.

But suffice to say that most all of the short to mid-term pressure on solar and BESS cost, meaning increased costs for modules, batteries, racking, switchgear, and all the cable and wiring, is being driven by a very active federal legislative regulatory protective agenda, as well as the ongoing instability of commodities and continued shipping and logistics constraints. Next. Moving on.

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Shipping and Logistics, International Cargo. Commodity Pricing Drivers, Oil and Gas product, Conductive Metals, Steel, Lithium Carbonate

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So, much of our planning efforts now focus on what we can do to hedge commodity pricing, as well as get out in front of supply and logistics issues which do require a level of knowledge and expertise that we didn't initially have in-house.

So, we've had to bring that experience talent into our management team allowing us to get out in front of this challenge.

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Supply Capacity Constraints/Lead Times. Traditional Long Lead Items: Main Power Transformers, 40-56 weeks. Inverters, 20-24 weeks. International Piers and Racking,18-24 weeks. Domestic Piers,12-16 weeks. Termination Products. 600A Load Break Elbows, 8-10 weeks. Concentric Terms, 6-8 weeks. Tape Shield Terms, 4-7 weeks. Wire and Cable. Medium Voltage UD, 38-35 weeks. 2kV Feeder Type PV Domestic, 22-56 weeks. 2kV Feeder Type PV International, 16-22 weeks. 2kV String Wire, 14-35 weeks. Over-molded Harnesses, 14-16 weeks

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And moving on. This just gives you a rough idea from a shipping and logistics standpoint of what the lead times are for a lot of the critical components making up a PV plant project. And these number of weeks represent anywhere from two to three times of what we could have expected, say, 12 to 18 months ago. And it doesn't look to get any better over the next 12 to 18 months. Ok, moving on.

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Renewable Energy (RE) Future Prospects. Notwithstanding likely super cycle driven market supply and commodity price challenges, the fundamental market and regulatory drivers remain stable to ensure sustainable growth for RE projects over the next decade. The proverbial mine field of opportunity. Plan, plan, then plan some more. Pick the right developer/owner partner. Engage very early in the design process. Integrated Project Delivery (IPD) vs. RFP Bids. Proactive w/supply chain hedging/ management. Labor force training as core competency.

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So, in summary, the long-term prospects for the renewable energy industry are positive. Being a credible player in any aspect of this industry over the next 10 years is a great place to be, but caveat emptor, there are significant short, mid-term challenges that require EPCs to be smart about how we approach and engage with our clients, while investing significantly in getting out in front of the commodity and supply chain constraints, of course, while constantly enhancing and training our workforce. I know that's a lot to digest in a short period of time, but hopefully gives a decent perspective on how utility scale EPCs are looking at the market. Back to you, Joan.

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All four speakers share the screen.

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JOAN WOODWARD: All right. Well, Duncan, Justin, and Eileen, thanks so much. We just did a rapid fire just to level set, educate our audience and myself a little bit about what's going on in the industry. So, it just sounds like really an exciting place to be and. With a lot of government support for the industry in the past and certainly coming back your way in the future, as we know, a lot of focus on the sector. So, we're thrilled to be involved in the whole alternative space.

Before we get started in our moderated discussion, I'm going to throw the audience a question. So, for all of you in our audience out there, we're going to ask you to vote on--it's an easy thing if you haven't done it on Zoom. There's going to be a question that pops up on your screen right now. Globally, renewable electrical capacity is projected to increase by what percent between 2020 and 2026? So globally, electrical capacity is projected to increase by what percent?

Because we know we're growing rapidly, but can the system really handle all this growth? And what is the projection here? So 10%, 25%, 50, or 60? A lot of people saying 50. Looks like the 50 if we're going to close the poll now. Well, you're all pretty much right. The correct answer is 60%. I mean, a 60% increase over 20-some years is really astounding for any industry, right? Duncan, is this to you something that's achievable frankly?

DUNCAN FREDERICK: Well, when you look at everything I was discussing earlier and given the pipeline that's in place, assuming that we're getting out beyond some of these short to mid-term pricing constraints, shipping and logistics issues, and so on, and assuming that the incentives do get extended, which I think there's a very, very good shot of that happening, yes, I do. I do believe it is.

JOAN WOODWARD: So, you referred to the ITC. That's the Investment Tax Credit, right? And Congress has to pass that almost every year, right?

DUNCAN FREDERICK: Well, it's actually part of the--I know we'll probably be chatting about this later, but it's part of the BBB bill, the Build Back Better Bill. And so, all the indices and the prognosticators are saying that it looks like they're going to try and carve the climate portion out of that, in which case, we would see extensions for both the Investment Tax Credit and Production Tax Credit. Although I'd probably defer to Justin, being at the front of that whole activity. Because as an EPC, we're tracking closely with great partners, like Arevon, in terms of what their pipelines look like. So, I'd be curious to get his take on that.

JOAN WOODWARD: Justin, you want to--I know we're supposed to be talking about this later in the program. But if you want to have a few minutes on this, we'd love to understand it. Because it really does drive a lot of decision making in the sector, right, what Congress does or doesn't do. And sometimes they let those tax credits lapse, don't they?

JUSTIN JOHNSON: Yeah, they sure do. And wind, especially, experienced over the last decade and more a lot of time periods where the tax credit would lapsed for a year and then it'd be renewed in December of the following year. So that start-stop nature just caused havoc on developers and manufacturers. So, it is important to try to extend the tax credits. Right now, there is a tax credit in place for solar and for wind, but they are phasing out.

So, the provisions within the Build Back Better would revert the tax credits to the former. For instance, the Investment Tax Credit to 30% for solar, this year it's currently at 26%, and then 22% next year without increasing it. And Build Back Better had provisions to establish an ITC, an Investment Tax Credit, for storage, for example, for standalone storage. Because right now, storage is only eligible for a tax credit if it is coupled with a solar plant, for instance, and only charged by the solar plant.

So, we're hopeful that the Build Back Better plan--we obviously saw how it caused a lot of friction in Congress, but we're hopeful. And from what we hear that there is more bipartisan support for the clean energy provisions in the Build Back Better plan, so we're hopeful something will get passed this year to just provide that long-term certainty that the industry needs to make the investments in manufacturing, to make the investments in construction, development to meet the growth targets that we saw on the previous slides.

JOAN WOODWARD: Great. OK. I also have to remind our insurance friends in the audience that this is not unique to your industry. Congress, on many occasions, has let the National Flood Insurance Program, the NFIP, lapse. And so those lapses cause a lot of people a lot of disruption in the authorization of the National Flood Insurance Program. So, it is not just your industry. It's sometimes Congress. And of course, they do the retroactive version of it. So hopefully, hopefully, we'll have our fingers crossed that some portion of that Bill can get spun out. I know we're going to talk about it later.

I want to get to the more macro level here. So, the proportion of electricity that the U.S. got from wind and solar nearly quadrupled in the last 10 years or so, and now makes up 11% of the nation's electricity. How do we expect this trend really to play out? And what does it mean for business leaders on the line today, shifting more to alternatives?

DUNCAN FREDERICK: Well, I guess I can take a first stab at that.

EILEEN KAUFFMAN: Go ahead, Duncan.

DUNCAN FREDERICK: Projections for renewable percentage of total production, they vary widely depending on who you talk to. Obviously, it's impacted by sensitivity policy, which we've been talking quite a bit about. Supply chain, new technology, install cost efficiencies. But based on the information that we have and we're constantly looking at the crystal ball trying to report into our stakeholders, really, how robust is this growth? We're putting that forecast between 30% and 50% by 2030.

JOAN WOODWARD: OK.

EILEEN KAUFFMAN: I think we also need to think about the economic growth opportunities here, Joan. When you think of the job growth and the infrastructure development, the upgrading of existing grid lines, port development along the eastern seaboard, this is also a great economic growth for our community and our country. It's opportunities for customers and agents and brokers not just to think about the power generation asset, but rather the entire bio network itself.

JOAN WOODWARD: OK, so it's the broader--so agents and brokers may not be intimately knowledgeable about the sector, but, Eileen, you're speaking more broadly. There's a lot of other tangential pieces to this that are tied together, right?

EILEEN KAUFFMAN: Yep, absolutely.

JOAN WOODWARD: OK. So, let's get more in technology. So, this is maybe to Justin. Technology-related renewable energy is really rapidly changing. Eileen mentioned the battery energy storage systems in her opening. Talk to us about the opportunities there or the challenges that presents for your industry.

JUSTIN JOHNSON: Yeah, it's been a great opportunity really more than anything. I've been in the industry for I guess 16 years now. And it's really two factors that have conspired to achieve the incredible growth we've seen, and it's that the technology improves. Whether it's wind or solar, the wind turbines themselves or the solar panels themselves have become more productive over time because of improvements in technology.

And then the cost of that equipment, the installed cost and the operating cost, has gone down over time. So, the fact that the technology is improved, and the costs have gone down, those two things conspire to achieve those low, levelized cost of energy numbers that you saw, where solar and wind are the cheapest or among the cheapest forms of new generation in the marketplace. And that's what creates all the demand from our customers.

The challenges there are--on the wind side, for example, every year, you're building a new wind farm with the next greatest turbine, the newest turbine. It's an evolution. Certainly not a revolution in technology, but the technology is evolving every year, year to year. And that can create missteps and challenges along the way that just folks have to get comfortable with, whether you're an insurance underwriter, or whether you're an owner and provider, or whether you're on the construction side and you're designing a new plant, you have to keep up to speed with all of those technology advances and incorporate them into your business models so you can continue to be successful.

JOAN WOODWARD: Great. Well, that brings us right back to Eileen on insurance considerations. So, how do you work through those challenges to provide those insurance solutions with this rapidly evolving technology changes? Are the insurance products evolving all the time? Tell us about the underwriting challenges here.

EILEEN KAUFFMAN: Yeah, definitely to Justin's point, it is a challenge on the insurance side. We don't have the depth of data to analyze the details that we're used to reviewing, right? So, to Justin's point, the process of educating, research, and engagement, and even the reciprocal feedback, it's crucial for us as an insurer. When you think about even like codes and standards and certifications, Joan, they're constantly evolving. And they'll become more refined as the sector matures but staying on top of those codes and standards is definitely a challenge.

I think one of the crucial things for insurers is really getting our understanding around the maximum foreseeable loss when it comes to battery energy storage. So, getting our arms around the MFL potential is paramount. We're focusing on that. And then when you think about some of the key underwriting considerations when it comes to battery energy storage, the review of the site diagrams and the planning and installation is critical from an insurer.

Contingency planning when you're thinking about the local emergency services, what type of monitoring systems or extinguishing systems, and even temperature control systems, they're all things that we take into consideration when we're assessing the risk. But when you really think about the system and the design and the installation, it's really being on the front end and the pre-planning with the insured as they're building out these sites. And getting engaged with them, with our risk control consultants on the front end is highly encouraged.

JOAN WOODWARD: OK. So, let's go more macro. And, Duncan, this is going to be for you. Well-known supply chain issues globally. And obviously, with the situation in Ukraine, continued concern over the price of crude oil and even the supply of it. And many industries are also facing labor shortages, so unable to find the skilled worker. What do these challenges mean for you and your business? And are you facing the same labor shortages? Or it sounds like just people are flocking to your industry at the moment.

DUNCAN FREDERICK: It's yes and no. As a union electrical contractor, we've been fortunate in being able to meet most of our skilled labor requirements in the field. We work with the union halls, labor consulting firms. And to date, we've been able to address all those needs on a per project field basis. Our biggest challenge really has been trying to find and hire more qualified project management, engineering, and estimating candidates. And that's the single biggest impediment to our growth right now.

So, on the one hand, being union, believe it or not, gives us an advantage out there because we can plan for capacity very effectively as we move from one market to another. But getting those qualified tenured senior level estimators, engineers, project managers, and so on that you need to drive these projects forward, that's a challenge right now. No question.

JOAN WOODWARD: Justin, what are you seeing?

JUSTIN JOHNSON: From a labor perspective?

JOAN WOODWARD: Yeah.

JUSTIN JOHNSON: Yeah, I think it is--I mean, it's a local issue, and it depends on where you're installing in the U.S., just how scarce the labor can be. And it often comes down to economics. But yeah, in certain regions of the U.S. where you're competing against an indoor manufacturing job that's been there a long time and a laborer has to choose between working out in the elements or working in manufacturing, you typically have to offer a premium if you want to get that labor. So, it's something you have to plan for. If you're not willing to offer a premium, then you see the scarcity issues that Duncan alluded to.

JOAN WOODWARD: Eileen, do you want to weigh in from a underwriting perspective? And as you think about the new technologies changing, what about the global supply chain problems? I mean, do you expect that to alleviate soon? Are these solar and wind parts, if you will, I'm not an expert in this area, but are the components generally made in the United States or are there supply chain just-in-time inventory issues that we're seeing as well?

EILEEN KAUFFMAN: Definitely, on the insurance side, we have just-in-time inventory issues. Most of the component parts are not made in the U.S. They're made overseas, China for the most part. And when you think about steel prices are almost doubled, as Duncan was talking about earlier in [inaudible] and [inaudible] surges.

We're seeing significant delay times, where some component parts that we're trying to replace, it's anywhere from almost a five week to 50 weeks now to get those parts in for our clean resolution. So, it's something that we are definitely paying close attention to, Joan. One of the things that we do with our insureds is really understand their contingency plans. Are they using top-tier manufacturers? What's the lead time on their component parts? What type of spare parts inventory do they have on hand to address these issues as they arise? And sometimes that's costly, right, sometimes the OEM picks up their spare parts and has them in their contract, because that is a cost to the insured, but basically for us as any insurer, it's really addressing these issues on ongoing conversations with our distribution partners and our insurers to mitigate any potential losses from the supply chain concern.

JOAN WOODWARD: All right, let's talk a bit about natural disasters, climate change, natural peril exposure is really salient in the space with renewables, particularly with solar. In the insurance industry, we've seen a lot of claims driven by hail, wildfire, windstorm, flood, and even the winter storm we had in Texas. So, talk to us, maybe Justin, how is this extreme weather taken into consideration in terms of your strategic planning, your project development, pipeline, equipment, procurement--how do you plan for these massive hail events, or windstorm events?

JUSTIN JOHNSON: Yeah, that's a great question, and it does. It starts early on in development, and having good development practices, and then continues onto construction and operations. But we try to create a virtuous feedback loop between our development team, our engineering team, our underwriters, and really look at stuff early on to assess the risks when you're out prospecting for places to put new solar sites, for example, look for potential risks, whether it's a flooding risk, or a hail risk, or some other wildfire risk, or whatever, and figure out what the mitigation options are, whether that be move the project, select different land, or is there some different equipment choice you can make, or a different operation strategy that you can employ that you think you can use to mitigate those risks, I think.

And then from an operations perspective-- We're still learning, it's a high-growth, young industry, so we have to be willing to learn as we go. And that takes that feedback loop and having an open mind and working with their underwriters to understand the losses that are occurring and see what we can do to mitigate those losses. So, I think wildfires are a great example, where there's a lot of stuff you can do to really eliminate the risks of loss at your plants, with fire breaks and really keep the vegetation under control, and protecting open conductors, and things like that to significantly reduce your risk.

JOAN WOODWARD: And to Duncan, to you on the same question, what are your considerations from natural disasters when you do design installation? How do you think about that?

DUNCAN FREDERICK: Yeah, the industry is constantly evolving on this. Newer tracker systems now feature, hailstone modes that help lessen the impact by tilting modules, so the actual impact is a glancing blow rather than a direct hit. For hurricane windstorm--site-specific wind studies--we do those on a regular basis to analyze the site-specific surrounding terrain and the effects it will have on the project and the expected winds within the site. Most projects are designed to 100-year events, which should decrease the likelihood of an event happening in the plant's typical life--30 to 40 years. At the end of the day, site selection is the best way to mitigate many of those risks by just staying away from riskier locations than others.

JOAN WOODWARD: OK, great. Eileen, do you want to talk about underwriting and thinking about these perils, especially hail, wildfire?

EILEEN KAUFFMAN: Yeah, I mean, when you think about just through October 8, I think it was, of 2021, there's been 18 weather climate disasters here in the U.S., exceeding about $1 billion each. So, we've seen our fair share of weather climate disasters here. At Travelers, we take that into consideration when we're assessing the natural perils exposures. We have our in-house meteorologists and our Nat Cat team--or Nat Cat center--that is directly accessible using the latest technology and proprietary tools that are available.

Like Justin said, wildfire for example, it is a challenge for an insurer, because the fact that it's not predictable year over year, right, and to Justin's point, I mean, he named some of the things we look at as an insurer. Vegetation management is key when it comes to the wildfire exposure, and on-site smoking policy is critical. But it also comes down to the state regulations that we need to consider, like California and Oregon, where as an insurer we have very limited terms and conditions that we could put out on wildfire to protect the insurer too, so those are things that we take into consideration.

I say when it comes to hail, as Duncan said, it continues to be a major market loss for us here as an insurer, especially in Texas market, which is a market that is extremely hard to ignore, but it presents a lot of challenges from an aggregation when you think about the hail exposure. Duncan did mention around the trackers and the technology that continues to evolve against hail. We struggle as an insurer with some of that technology. It's still unproven in solving the true issues around hail, but we continue to watch that technology evolve. And for us as an insurer, we continue to work with our Nat Cat team on the advancements of modeling and data, which is critical in this space when you think of natural catastrophes.

JOAN WOODWARD: OK. This is maybe for Duncan or Justin, or both of you. Investment in transmission development has really been identified as a key area for upgrade and modernization this year to enable the growth that we're all talking about. What can be done really to address the significant challenges which transmission projects, especially in the regional ones, have faced in terms of gaining that regulatory approval from every state they cross, as well as dealing with landowners who might be refusing opposition from environmental groups? So, talk to me a few minutes about the transmission side of it.

JUSTIN JOHNSON: Yeah, I can jump in on that one, Joan. Transmission development is sorely needed. And if you look at just the interconnect queues for wind and solar assets all around the U.S., whether in PJM, or Kaiser, or ERCOT the queue in MISO, the queues are just overloaded with new interconnection requests, so there's all this potential supply of renewable energy, but the queues are so full they're having a hard time studying it in a timely manner. And then some of the results are coming back with obscene upgrade costs to the transmission system. And then the issues you mentioned, the transmission development is very, very difficult, because it's typically--for renewables a lot of times you want to take it across state lines, so you'd want to take really cheap wind energy from Oklahoma maybe and get it to the Southeast, or something like that. And there isn't a good regulatory process to get approval in one go across all those states. You have to do it in a state-by-state approach, and each one of those states essentially has what amounts to veto power over your loan, because it can be nearly impossible to go around the state.

So, I'm not a transmission expert, but there does need to be some sort of regulatory certainty and procedures in place to enable the approval of those lines across state lines, because it's sorely needed to. The transmission system was built really with a fossil generation in mind, and as we transition to renewable energy, we need to have transmission lines that are sized and located where those renewable resources are.

JOAN WOODWARD: Duncan, do you have anything to add on transmission issues in your space?

DUNCAN FREDERICK: Quite frankly, Justin did a great job from a big picture perspective. Obviously, as a full-service electrical contractor, we're watching this area very carefully to see how it's going to evolve. Certainly, it would be a great fit for what we do, but right now it's not part of our existing business mix and pipeline, but something we're watching carefully.

JOAN WOODWARD: OK, we--

[INTERPOSING VOICES]

Oh, yes, go ahead, Eileen.

EILEEN KAUFFMAN: An insurer standpoint, the transmission upgrade is paramount. When you think of the aging infrastructure as Justin was speaking to, and you think of the large utility fire in California a couple of years ago, it's an issue that we are looking at closely, because the assumption that we're taking when we are assessing a risk is that that utility grid, those inverters, and their substations are being maintained by a utility company, so we're taking on that risk as an insurer, especially if we're going to give-- on our terms and conditions we're going to provide any type of contingency business income. So, for us it's paramount around this upgrades to the transmission from an insurance standpoint.

JOAN WOODWARD: OK, great. We have so many good questions coming in from the audience. I'm just going to go right to them and maybe we can do a bit of a rapid fire around the room here. First one for you, Eileen. This comes to us from Adam Griggs, JA Knapp Insurance. Do you feel admitted markets will begin taking a more open approach to these risks as the industry grows and evolves?

EILEEN KAUFFMAN: In short, yes. Considering the depth and breadth of the U.S. buildout, I do believe more carrier capacity is going to be demanded. I think it's safe to us to assume that the admitted market will gravitate towards more domestically domiciled risk as they seek to grow their exposures in this area. But I would be cautious around that growth when you think, historically, in the renewable space, it's been unprofitable for insurers. And only very recently have we demonstrated some marginal profitability as the market has evolved, where terms and conditions, and pricings have corrected to a level, which gives at least a better chance of sustained profitability over time, most of this driven from Nat Cat concerns, when you think of flood, hail, and wildfire.

But when you really think around the scope and scale of some of these projects being built, the capacity that's going to be required to support their insurance needs, the traditional admitted carrier who's going to write that 100% play might not be the viable source or solution for those sized projects. And a syndicate approach, where you have a diverse panel of carriers, could be a better fit. So, yeah, I do believe there's going to be entrances into this market from the admitted carriers here domestically, I do think it's going to be a slow entrance over time, but when you think about the larger scale projects, it's still going to be a syndicate play, because of the capacity that we need to put up as insurer.

JOAN WOODWARD: OK, great. To Duncan or Justin this one, what do you see is the most promising technologies for energy storage beyond the lithium, ion, or BESS?

DUNCAN FREDERICK: I can probably take a stab at that. There's more and more demand for longer duration storage solutions beyond current bankable lithium BESS solutions, and that really points to new and emerging technologies that can demonstrate commercial level viability, bankability over the next three to five years. So, that includes technology like flow batteries, flywheels, thermal storage, compressed air solutions. There's a lot of buzz around this tech, as they promise to provide longer durations, have a longer life cycle and particularly are much operationally safer, much safer than current LFP, NMC battery storage technology out there. But unfortunately, most of this tech is still in the research and development mode. Now with that said, we may be installing our first flow battery solution on a small utility scale PV project here next year, so more to come on that.

JOAN WOODWARD: OK, great. Next question, probably for Justin, are there many privately owned solar fields not owned by utilities? If not, why not?

JUSTIN JOHNSON: Oh, yes, there are a lot. I think Arevon is an example of that. And those folks, we call independent power producers. So Arevon developed, constructs, and then owns and operates solar plants. And then we sell the electricity to typically traditional utilities, like a PG&E, or an APS, or to commercial off-takers like an Apple, or a Facebook, or Amazon.

And there's a lot of examples like that out there. My former employer, EDP Renewables was one of those. Invenergy comes to mind. So, there's a lot of IPPs, independent power producers, that do that.

JOAN WOODWARD: Next question from Chris Shugart, and also Clint Ledbetter had almost the same question. You hear the power business used to use primarily U.S. or European-made equipment and parts. What are the implications of shifting the supply chain to Asia, and how are we managing that? And second part of the question, is there any movement in the Build Back Better plan to require more U.S. manufacturing of these parts?

JUSTIN JOHNSON: I can take that. That is correct. I think, there is--especially the solar industry, there's a lot of Asian suppliers. Modules in particular, you have one choice. That's kind of, go with the Chinese supplier, or you go with First Solar, who's an American manufacturer. First Solar can't supply the whole U.S. industry. So even if you're a big customer of those, you're left going to Asia.

And that creates all sorts of challenges when you have logistics issues like we have today, and you're dealing with equipment shipping from Asia that causes construction delays and challenges. When there's geopolitical tensions, that causes risk to your projects that are hard to manage and just hard to predict, but just keep you awake at night.

There are--so it's obviously something we would personally, and I think our industry, would love to have incentives to bring that manufacturing back to the U.S. And the Build Back Better plan did have all sorts of incentives for manufacturers to be in manufacturing in the U.S. and for developers and owners like ourselves to source domestic content for our plants. And so, I think getting that passed would be helpful to onshoring those industries, bring them back to the U.S. with the proper incentives.

JOAN WOODWARD: Another basic question for all of us learning about these technologies. I was traveling recently in Southern California. It was a very windy day. However, in Palm Springs, the windmills were not turning. Why is that?

JUSTIN JOHNSON: It could be any one of a number of things. I mean, if it was--it could be a maintenance issue. But if-- that should only affect maybe 5% of the turbines. On a windy day in the middle of the day in Southern California, it could be just that there's more generation that is needed. So, the power is being curtailed. So those plants are being asked to shut off.

California is kind of a prototypical example, of, it has a ton of solar generation installed. So, it has the-- there's excess solar energy in the middle of the day, which used to be the peak period, so that they could be curtailing energy during that time because it's not needed.

JOAN WOODWARD: Question coming in from Raymond Lung. Would geothermal be a cost-effective renewable energy?

DUNCAN FREDERICK: Well, I can jump in here. From an EPC perspective, we've done work on a number of these plants out there from an electrical standpoint. And there's quite a bit of it out there. I defer more to Justin from a developer's perspective, as you weigh in on the different technologies of how you would see the future for geothermal.

Obviously, it's very specific in terms of where you find this resource. But for those plants that we've worked on, we know that they are great investments and represent good returns for their owners.

JOAN WOODWARD: Ok, next one, a little bit outside the box. So, I don't know if you guys want to take it on or not. But recently, we saw a very large cargo ship filled with luxury cars in the middle of the ocean sink with those 1,000 Lamborghinis, Bentleys, and other Porsches sink. And it was blamed on the highly flammable batteries inside, or at least a contributing factor. Any thoughts around there, either Eileen from an insurance perspective, or from a battery catching on fire perspective, that obviously, frankly, scares consumers.

EILEEN KAUFFMAN: Yeah. From an insurers' perspective, we are definitely watching this emerging issue around EVs, and batteries, and vehicles. I mean, even when you think of it expanding beyond automobiles, right down going into the construction industry, transportation industry, from large trucking fleets that are starting to use battery, even the Marine space that you're talking about.

It's a concern for us as an insurer. And we're watching this closely. Regarding that loss, I'm not going to comment on anything around that loss, just because right now, it's an unknown of the actual cause and anything that happened out there. So--

JOAN WOODWARD: Any other comments?

EILEEN KAUFFMAN: --but guys, anything from Justin or Duncan side of what your thoughts are.

JUSTIN JOHNSON: No, I mean, I actually remember seeing that in the news, and I didn't realize that that was potentially linked to batteries. I do think there are new technologies out there, whether it's solid-state lithium batteries that have a much-reduced thermal risk. Or just, I don't deal with the vehicles as much.

But in the stationary storage side, just like with solar, you have to plan as if a fire will occur. And you want to make sure that you're mitigating the damage it would cause to the plant. So, firebreaks, vegetation management, all those sorts of things. You have to do the same thing with batteries.

When we install a battery plant, we want to make sure we build it, develop it, construct it, and operate it assuming that a fire is going to happen at some point. And that we have the appropriate design and technologies in place to mitigate that thermal event as much as possible, so it doesn't spread throughout the plant or to other parts of the facility.

JOAN WOODWARD: Thank you for that. Another question. And this is probably the 800-pound gorilla in the room today, which is cyber risk and cybersecurity concerns, especially with the Ukrainian situation going on now and the propensity for certain nation states to potentially go after our critical infrastructure.

And how do you think about cybersecurity and transmission, given that a lot of our transmission lines and infrastructure is owned locally and not coordinated on a more federal level in terms of the cyber risk. So that's to all three of you.

JUSTIN JOHNSON: I think, I mean, I'll jump right in. I think cyber is one of those--with the current situation with Ukraine and Russia, cyber is one of those things that worries me more than anything else.

Just because so much of our lives, whether it's the power industry, the financial industry, you name it, it is all in the cloud. Or it's our bank accounts are numbers on a computer screen, things like that. And it's all susceptible to hacking.

So, the U.S. and the regulatory agencies are very worried about this too and have a lot of strict guidelines that we as an owner have to comply with. And there's been a lot of updating and things we've had to do recently with the events that have unfolded in Ukraine.

But it has to be a priority for all of us out there. Because it is a real risk. And the risk when you look at some of the things that can be done with cyber can be quite damaging to the economy, quite damaging to health and public safety. So, we all have to do our part to keep an eye on it.

[INTERPOSING VOICES]

EILEEN KAUFFMAN: From an insurer standpoint, it's something that we focus on consistently, Joan. I mean, something that we talk to all of our distribution partners and our insureds who are having large portfolios across the U.S. and globally. And we have a cyber product here at Travelers that we definitely get our cyber team involved. But it's something that we definitely talk with our distribution and our insureds about.

JOAN WOODWARD: OK.

EILEEN KAUFFMAN: To Justin's point, it's critical. It's critical.

JOAN WOODWARD: Anything to add on that, Duncan?

DUNCAN FREDERICK: Not at this point. I think they covered it pretty well. At the end of the day, we're the ones that are having to install all of this hardware and software. So, we've got a whole department that focuses just on that. And it's constantly evolving and extremely sophisticated. And I'm not the right one to talk to you about that. [LAUGHS]

DUNCAN FREDERICK: But it is a huge focal point for us.

JOAN WOODWARD: Great. Well, listen, we have run out of time. And I just so appreciate that the three of you joined me today. So, a big thanks to Duncan, Justin, and Eileen for all your thoughts. And we're going to be monitoring. And as Eileen said, we're really heavy into this space. And we intend to stay there and be experts in the field. So, I'm grateful for our three terrific panelists today. So, thank you, all.

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Wednesdays With Woodward Webinar Series. Upcoming Webinars: March 16 – Global Hot Spots and Geopolitical Risks with Former U.S. Secretary of Defense Chuck Hagel. March 30 – Ready to Take Over? Driver Distraction in the Age of Automation Featuring Safe Roads Alliance's Emily Stein and IIHS' Dr. Alexandra Mueller and Dr. Ian Reagan. Visit us: travelers Institute dot org.

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I do want to have a program note. I have a very, very special guest coming up in two weeks from today with former Secretary of Defense, Chuck Hagel, will be joining me to talk about global hot spots and including the Ukrainian crisis, China, Iran, all the places around the world that he is expert in. So, thanks to former Secretary of Defense, Chuck Hagel. That's on March 16.

And then, we'll have on March 30, kicking off distracted driving month, "Are You Ready to Take Over," with distraction on the roads with our experts at the Insurance Institute for Highway Safety. And that's on March 30.

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Watch Replays: Travelers Institute dot org. Connect: LinkedIn, Joan Kois Woodward. Take Our Survey: Link in chat. hashtag WednesdayswithWoodward

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So, if you haven't taken our survey, it's in the chat. Please do that. We love to hear your feedback on all of our programs. And again, thank you to our three terrific speakers today. We appreciate you being here.

EILEEN KAUFFMAN: Thank you, Joan.

JUSTIN JOHNSON: Thank you very much, Joan.

DUNCAN FREDERICK: Thank you.

JOAN WOODWARD: All right. Stay safe, my friends. We'll see you in two weeks.

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