Exploring the new Renewable Energy Zones

Ex-tropical cyclone Alfred exposed weaknesses in Australia’s vital infrastructure, which raises the question as to how the country can improve its natural disaster-resilience, whilst also reducing its carbon footprint. In this article, we consider where the new Renewable Energy Zones (REZs) fit into the equation.

Renewable Energy Zones (REZs) are areas rich in renewable resources which can be developed so that energy generation, transmission and storage are all carried out in one area. 

While Australia has an abundance of natural renewable energy sources, such as sun and wind, often the areas most rich in these are not well connected to the country’s electricity network. REZs aim to solve this problem by allowing for coordinated energy infrastructure development that takes advantage of economies of scale.

Several regions have been identified in Australia as being potential REZs.

So, what are the actual benefits?

These include:

• lower electricity costs for consumers – if REZ development is coordinated with a focus on forward planning and economies of scale, the end result is likely to be lower costs for consumers.
• reduced impact on local communities – the aim is to enhance stakeholder engagement and better equip communities as partners in the REZ development.
• new investment opportunities – which in turn creates long-term employment opportunities.
• improved environmental outcomes – a range of matters including waste management, First Nations considerations and other land issues will be assessed upfront by appointed government agencies. 

Queensland focus 

In Queensland a total of 12 potential REZs have been identified so far. The Queensland REZs are likely to be those of most ‘concern’ to insurers, given its tropical climate and that it is particularly vulnerable to cyclones. 

The Queensland REZs will be developed over three phases from 2022 to 2035, to connect up to 22GW of renewable energy generation projects. The Queensland Government has released targets of producing 50% renewable energy by 2030, 70% by 2032 and 80% by 2035. REZs will play a critical role in helping achieve these targets. 

How is a REZ developed?

The Queensland Government released a Renewable Energy Zone Roadmap (REZ Roadmap), which sets out four stages to developing a REZ.

Stage one: planning REZs with communities

The first stage involves long-term planning for potential REZ locations and includes engaging with communities and the renewable energy sector.

To determine if an area could be a potential REZ, several factors are considered including investor interest and how that aligns with broader system transformation and compatibility with other land uses.

It also involves the state government carrying out strategic REZ ‘readiness assessments’ by engaging with communities to understand the suitability of potential REZ locations and how to support the social, environmental and economic needs of the region. Renewable energy developers will also engage with landowners and conduct and plan environmental assessments.

Stage two: consultation and declaring a REZ

Formal consultation is undertaken and a draft REZ Management Plan is produced for a specific REZ. As part of this process, the state government may also commission a detailed REZ ‘readiness assessment’ to understand and plan for the immediate local needs of the host community. The government will work with stakeholders and establish local reference groups. Renewable energy developers will also engage with the community to progress project development assessments and negotiate connection agreements with network operators to connect into the REZ.

Stage three: construction and operation

The construction and operation of the REZ will begin at this stage, including the required network infrastructure upgrades. The developers will finalise projects by engaging with landowners, securing financing, finishing planning and environmental assessments and completing construction.

Network operators will engage with REZ host communities and local reference groups to progress final network design as well as the construction, connection, commission and operation of the REZ. 

Stage four: commissioned

At this stage, the REZ is operational, and all the connecting projects are completed.

This stage involves the Queensland Government supporting communities throughout the REZ lifecycle and continuing to engage with local reference groups. Powerlink will operate the REZ, and decommissioning or reinvestment will be considered in line with the REZ Management Plan and project approvals. 

Impact for Insurers – accumulation risks?

While these REZs will provide job opportunities and reduce Australia’s reliance on fossil fuels, they do not come without their risks. In particular, there are major insurance challenges to overcome. 

The biggest concern for insurers is likely to be accumulation risk, where there will be a large amount of high value assets in a small geographical area. This is against the further issue of increasing incidences of extreme weather and natural catastrophes. Australia is experiencing more frequent La Nina seasons, for example, which increases the frequency of tropical cyclones and likelihood that those cyclones make landfall. There is therefore ever-increasing risk that a single weather event could wipe out multiple projects and shared infrastructure within a REZ. 

This accumulation of risk may lead to insurers being forced to sublimit capacity for certain risks like hail or bushfire. Capacity within a geographical area may also be limited - if one insurer is already providing coverage for another project in the same zone, they may be less likely to offer cover to other co-located projects.

A solution?

REZs may require the insurance market to look outside of traditional insurance solutions to come up with alternative coverage options, such as those that combine e.g., property covers with parametric policies, which trigger pre-determined payouts based on objective parameters, such as wind speed, rainfall, or earthquake intensity. Performance guarantee bonds or offtake insurances could also assist with convincing investors of the bankability of these projects and allowing underwriters to better hedge their risk. As ever, early partnership between the insurance market and the project developers is key.