Safeguarding Sustainability: Risk Management in Energy Investments

Written by
9 Oct 2024
Safeguarding Sustainability: Risk Management in Energy Investments

According to a report by consultancy Wood Mackenzie, $2.7 trillion worth of investments are needed annually to achieve net zero by 2050.

Investments — no matter the form or scale — come with their own risks. When it comes to energy investments, managing risks becomes even more essential as these investments are crucial to curbing carbon emissions.

According to a report by consultancy Wood Mackenzie, $2.7 trillion worth of investments are needed annually to achieve net zero by 2050.

Risks in energy investments

Assessing and mitigating risks in energy investments means knowing what the risks are first. These are the various types of risks anyone involved in investing in energy must know.

  1. Technical risks: Over the years, the energy sector has seen the rise of various technologies — from those used to harness solar and wind energy to the more sophisticated ones powered by artificial intelligence (AI) and machine learning. While these technologies are utterly helpful, they’re not immune to failures, vulnerabilities, or malfunctions that can disrupt operations. Failures and tech design, the intermittency of renewable sources themselves, and cyber threats are all risks that can reduce expected revenue, thereby posing a challenge to investors.
  2. Resource and environmental risks: The amount of investment in clean energy is increasing. A critical risk to consider is the possible inaccurate estimation of resource potential (e.g., wind speed, solar radiation). Managing this type of risk entails carefully assessing resource availability to minimise revenue reduction. ESG factors, such as ecological harm, public resistance, and community impact, can further impact energy projects. 
  3. Economic, market, and regulatory risks: As with any other investment, energy projects are inevitably tied to the local, regional, and global economic environment (e.g., interest rates, inflation, currency exchange rates). Market volatility like policy changes, energy demand, and oil price fluctuations can negatively or positively affect the profitability and feasibility of these projects. Regulations on emissions, land use, and safety standards can also increase operational costs or delay project timelines, ultimately affecting the return on investment.
  4. Geopolitical risks: Political instability and conflict can severely impact energy investments. For instance, the ongoing conflict between Ukraine and Russia and the tensions in the Middle East demonstrate how geopolitical events can disrupt energy supply chains and influence global energy markets.

Integrating modern risk management strategies

Conventionally, risk management was often driven by insurance after incidents. However, recent years have seen players prioritise prevention through strategic planning and advanced technology.

A 2022 report by PwC revealed that energy companies are increasing their investments in management technologies, with a particular emphasis on data analytics and process automation. According to the report, over 8 in 10 energy firms are ramping up spending on process automation and data visualisation tools, which enhance decision-making and operational efficiency.

Integrated risk management platforms are also becoming a priority, as they allow energy firms to centralise risk data and streamline reporting. 

On this front, Middle Eastern energy firms have demonstrated an above-average approach to risk management compared to their global peers. As early as the mid-2010s, a report by Marsh noted how Middle Eastern companies excel in hardware-related risk management due to their access to vast land, substantial capital investments, and the development of modern facilities. 

According to the report, Middle Eastern entities’ approach to remote isolation and flare design highlights their efforts to create safer installations and improve loss prevention strategies. 

The role of AI

Today, as the energy sector continues to shift toward cleaner sources, the use of AI — including in risk management — is becoming more prominent.

The role of AI is especially important in scenario planning and stress testing. These practices involve forecasting potential risks under various future scenarios (e.g., changes in regulations, market volatility) to prepare contingency plans and ensure business continuity. AI-powered systems are also now being used for predictive maintenance, minimising downtime, and reducing operational risks by identifying potential failures before they occur.

These advancements are best paired with conventional methods. For instance, risk transfer mechanisms, such as insurance, continue to be vital. Additionally, engaging with local communities, regulatory bodies, and other stakeholders is essential for managing social and political risks. Transparent communication and addressing concerns proactively can help mitigate resistance to projects.

This strategic management can help ensure the long-term sustainability of the energy transition, balancing innovation with resilience in the face of uncertainty.

Middle East & North Africa Energy Outlook Report 2025

This must-have report for industry players offers a comprehensive analysis of the latest technological advancements and forecasts for the energy landscape in one of the world's most pivotal regions, the Middle East and North Africa.

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