Hedging for renewables

The renewable energy market continues to expand around the globe with new technologies coming on stream, consumer demand growing and usage passed by the week.

However, renewable energy producers remain at the mercy of the elements to generate power and this has proved a stumbling block for investors. To date, the insurance industry has been unable to produce hedging instruments with the longevity required by the sector.

That may be about to change though with new products coming on line that allow renewable energy providers to hedge against a drop in the levels of wind or sunshine for longer periods.

Allianz Risk Transfer (ART) has executed a 10-year Proxy Revenue Swap with Capital Power’s Bloom Wind Farm, to be constructed near Dodge City, Kansas.

The risk management solution for hedging wind volume risks for wind farms has been developed by ART in partnership with hedge fund Nephila Capital, along with energy specialists REsurety and Altenex. The 10-year agreement will secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 178 MW Bloom Wind Farm.

“10-year revenue protection is something the market has not seen yet and is something that the market is getting excited about,” says ART managing director Karsten Berlage. “It’s important because finance people lending to long-term assets need 10 years. When the tenor of the financing is matched with the hedge it becomes more effective.”

The structure, which is similar in concept to a tolling agreement or capacity payments, swaps the floating revenues of a wind farm – those driven by the hourly wind resource and power prices – for a fixed annual payment.

Meanwhile, insurer Sciemus has launched an insurance policy to protect the owners of solar farms against a lack of sunlight.

We know the weather can be variable, and if sunshine levels are less than expected then the output of the farm diminishes, yet the farm operators are still obliged to pay back their bank debt - James Ingham

The policy pays out if levels of sunshine fall below an agreed amount - which thus reduces the output and revenues of the farm - and it is available as a hedging instrument for solar farm operators for up to 10 years.

“The problem many solar farms face is that they secure debt financing at the P95 level, leaving a 5% chance that the Annual Energy Production will not be achieved,” says Sciemus head of renewables James Ingham. “We know the weather can be variable, and if sunshine levels are less than expected then the output of the farm diminishes, yet the farm operators are still obliged to pay back their bank debt.”

The Sciemus product is also notable as it is one of the few standalone products aimed at solar farms.

“In the past if you wanted to buy a product like this you would have to buy a Property Damage programme with that same underwriter. That inhibited the ability to shop around and the broker who is trying to put together the best overall programme for their client is going to find it difficult if they’re tied to certain providers.”

However, it is the ability to match the needs of the investors to these hedge products that is significant.

“Generally speaking renewables need long-term transaction duration because of the underlying funding they receive, either equity or debt, and usually need to go out over at least 10 years. If you’re looking to de-risk a project to satisfy the lenders’ requirements, then a one-year policy really doesn’t do much,” says Julian Roberts managing director Alternative Risk Transfer Solutions, Agribusiness & Weather at Willis.

Recently Portugal ran on sustainably produced electricity alone for four consecutive days and this kind of markers are being recorded with increasing frequency as the renewable energy continues to grow.

Although the solar and wind products have been available for many years, the economics underlying them are changing - Julian Roberts

Solar power is experiencing growth across areas blessed with plenty of sunshine like the Middle East and North Africa as well as countries that have encouraged its use through regulation such as France and Germany. The sector has been slow to use insurance hedges and government subsidies is one reason why.

Roberts says: “Although the solar and wind products have been available for many years, the economics underlying them are changing. While tariff prices have been adequately high, most of these hedges haven’t really been needed, as they haven’t provided much value.

“However, if the price regime reduces you’re far more exposed to low production. If over the lifetime of your project the price you were expecting to receive is much lower than budgeted the original project risk and economics are thrown into question. This could well be a spur to interest in these products.”

And hedging products are not restricted to solar and wind production but apply to other areas of renewable generation.

Roberts says: “The exact same products exist for hydro but they’re a bit more complex because the relevant rain doesn’t necessarily fall on the power station itself but is usually in a remote catchment area somewhere up in the hills. You have to look at reservoir capacity and other factors. Ultimately if there hasn’t been enough rain or snow you may not have enough water to drive the turbines.”