Australia’s Renewable Energy Zone (REZ) strategy is central to the nation’s energy transition. By clustering generation and storage projects around shared transmission infrastructure, REZs aim to accelerate grid decarbonisation. However, as these zones are introduced and expand, unintended consequences are emerging for regulators, developers, investors and insurers alike.
By design, REZs aggregate physical risk. Assets that were once geographically dispersed are now concentrated within defined boundaries and exposed to the same perils, weather patterns and grid vulnerabilities. A single event, such as a bushfire, hailstorm, flood, or major grid outage, could therefore impact multiple assets simultaneously, creating a significant accumulation challenge for insurers and reinsurers.
Insurance capital, aggregation risk and market pressure
The concentration of asset values within REZs is drawing increased scrutiny from underwriting and catastrophe modelling teams, which must assess whether sufficient insurance capital exists to support these exposures. This aggregation risk is not theoretical. With hundreds of megawatts of capacity located within just a few square kilometres, insurers are facing portfolio stress scenarios previously unseen in the renewable energy sector. This raises important questions about capital adequacy and reinsurance support, not because of a lack of appetite, but due to simple arithmetic: how much capital can be effectively deployed in a single region?
A common misconception is that REZs inherently intensify Marginal Loss Factor (MLF) risk. In reality, they are designed to improve long-term MLF stability by coordinating generation with planned, purpose-built transmission capacity and avoiding ad-hoc connections on weak parts of the network.
However, sequencing matters. When generation comes online before transmission augmentation, short-term congestion, curtailment, and MLF fluctuation can emerge, not because REZs worsen MLF risk, but because network project delivery in the trial project construction in this example is delayed. For developers and financiers, this reinforces the need for robust revenue modelling, transparent grid planning and realistic representation of volatility. For insurers, while MLF is not an insurable peril, its indirect impacts revenue exposures and lender confidence.
Designing better projects: what developers and financiers need to know
For developers and financiers, this highlights the importance of disciplined revenue modelling, transparent grid planning and a clear understanding of revenue volatility.
We are currently operating in a soft insurance market, where the cost of capital is declining, creating a buyer’s market. But the question is, for how long? As capital tightens or loss experience increases, the sector may face a hardening market at precisely the time it needs insurance capacity most.
The solution lies in designing risk mitigants as much as buying insurance. Developers who engage with insurers early, at the concept and design stage, are better positioned to attract underwriting interest and secure capacity. Projects built to higher resilience standards, using proven technologies, robust supply chains and realistic maintenance regimes, inherently sell their risk more effectively.
The competitive advantage of strong risk design
By contrast, projects driven solely by the lowest EPC (Engineering, Procurement and Construction) cost may achieve short-term savings but often carry embedded long-tail risks. These are increasingly being priced out or declined by underwriters. Attractive risk design is becoming a genuine competitive advantage, and insurers are rewarding it. This advantage is underpinned by transparent engagement, robust data sharing and credible mitigation planning, all of which contribute to improved terms and broader market participation.
The shift required is simple but powerful: move from viewing insurance as a transaction to positioning it as a risk partnership.
How Lockton supports renewable energy clients
Renewable Energy Zones are a critical enabler of Australia’s net-zero ambitions. Still, without careful attention to risk concentration, design quality, and capital sustainability, they may become the next accumulation headache.
Lockton works with clients to structure, present and help protect renewable energy projects, ensuring they remain financeable and insurable in an increasingly complex market environment.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication.
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