Energy - market insights April 2025

The UK Government’s mandate on sustainable aviation fuel and implications to the industry

Sustainable Aviation Fuel (SAF) is thought to hold the potential to halve the aviation industry’s carbon emissions by 2050. The UK Government has recently introduced a new mandate for the replacement of fuel with SAF in phases which commenced on 1 January 2025.

The UK Government is intent on finding an alternative to traditional jet fuel to reduce carbon emissions and SAF appears to be the best alternative which can also become available commercially. As such, we can expect to see SAF used more widely in the coming years. This use of SAF will enable investors, airlines and consumers to all play a part in transitioning to a lower carbon emission aviation sector, which in turn will enable us to gain more of an insight around the many questions which currently remain for insurers.

However, insurers should be aware that SAF is not immune to criticism from environmental activists, who claim that the feedstocks used for biofuels (like SAF) replace land which could be used for growing food or for natural restoration projects, and could even cause deforestation in some cases (especially if the feedstocks derive from palm oil). The airline industry’s reliance on SAF as a more sustainable alternative to jet fuel could expose it to greenwashing allegations, and resulting regulatory investigations and penalties as well as consumer claims and strategic climate litigation.

SAF is also discussed in our aviation and travel market insights.

The increased use of nuclear energy

Since its launch in 2023, the role of Great British Nuclear (GBN) is becoming increasingly well-defined, encouraging investment predominantly in small modular reactor (SMR) technology. SMRs use carbon-free energy and repurpose waste heat, enabling on-site power generation. Hence, SMRs are remarkably efficient, increasing their popular usage.

Beyond SMRs, GBN is expected to play a pivotal role in large-scale gigawatt, advanced modular reactor and microreactor technologies, which will address supply chain integration and planning challenges. On 6 February 2025, the UK Government announced significant changes to planning laws to facilitate the wide-scale use of SMRs: by including mini-nuclear power stations in planning rules for the first time; allowing nuclear sites to be built anywhere across England and Wales; and removing the expiry date on nuclear planning rules to avoid projects becoming timed out. As such, regulators are considering custom regulatory frameworks that can support adaptable implementation in unconventional environments, all while upholding strict safety standards for decentralised operations.

As nuclear energy experiences a revival both in the UK and abroad, insurers are likely to see growing demand for appropriate cover to protect against physical risks during construction and operation of nuclear energy infrastructure and liability risks to third parties. Third party liability insurance will be in particular demand with the growing proximity of SMR to civil infrastructure and local communities; insurers will need to carry out rigorous risk assessments at the underwriting stage. Tailored cyber risk insurance products for the nuclear energy sector will also be required to protect against cyber terrorism risks. Over the coming decades, insurers are likely to play a prominent role in facilitating nuclear energy expansion in the UK and abroad.

Data centres

Pressure from governments and consumers across the world has meant that sustainability in data centres has transitioned from being a priority to a necessity and we will see an increase in construction with operators held to higher standards of accountability, transparency and efficiency requirements.

As stated above, we will see an increased use of SMRs to power these data centres. Another emerging area of focus is the convergence of nuclear energy and artificial intelligence (AI). In January 2025, the UK government announced the establishment of an AI Energy Council to explore opportunities to accelerate investment in renewable and innovative energy solutions, including SMRs. The government also announced the UK’s first “AI growth zone” in Culham, Oxfordshire, where later this year, it plans to launch the selection process for a private sector partner to develop one of the UK’s largest AI data centres.

Such construction projects are expected to attract unique risk and insurance considerations during both their construction and operational phases. The Construction all risks and Delay in start-up (DSU) insurance market has already witnessed the effects of supply chain issues on construction projects in the renewable energy sector, and the costs to insurers providing cover under DSU policies. AI data centres require specialised hardware and equipment such as advanced chips, power systems and cooling equipment, and insurers can therefore expect these projects to experience the same types of logistical and supply chain issues and resulting impact on cover.

AI data centres may also be vulnerable to serial defect issues, as they are likely to involve replicated hardware and software across multiple pieces of equipment. From a claims handling perspective, insurers will need to grapple with novel and complex technical issues, and assessing traditional insurance concepts such as “defect” and “damage” is likely to be a significant challenge in the face of such innovative and developing technology.

COP 29 – carbon markets and Article 6.4 projects in Energy sector

In November 2024, COP29 delegates in Baku, Azerbaijan unanimously agreed a carbon crediting methodology under Article 6.4 of the Paris Agreement – also referred to as Paris Agreement Crediting Mechanism (PACM). PACM is designed to help countries generate and trade carbon credits from emission reduction projects in order to meet their national climate targets. PACM is intended to introduce better quality standards to the voluntary carbon trading market by ensuring that any credits that are to be traded within the international carbon market are validated, verified and issued according to the framework established by the provisions of Article 6.4.

It is still early days to assess the impact this will have on the energy sector, but it is possible that the PACM will include project types like renewable energy (previously excluded by the voluntary carbon market). If it does, this could lead to increased demand for and financing of renewable energy projects, and resulting demand for insurance cover for these projects.