Electricity Price & Outage Solutions (ELPRO)

Managing power price volatility is often a challenging task, and unexpected outages create problems even in less volatile markets. An unplanned outage which leaves a power generator short may inevitably lead to losses – either from the purchase of an offsetting position in a high-cost spot market or from the opportunity cost of lost generation in a favorable market. As such losses have proven significant and painful, no counterparty with generation exposure should ignore the risk.

In Europe, for example, generation margins have become more volatile in recent years (see chart 1), following those in other energy markets. Commodity markets can hedge pure price risk very effectively, but what if the exposure is triggered by an unexpected outage?

Our solutionPower producers can manage that risk through Swiss Re Corporate Solutions’ Electricity Price & Outage (ELPRO) cover, which compensates them for output lost from unplanned outages based on market conditions at the time of the loss.

ELPRO competes very effectively with the costs of retaining the risk; utilities that choose to keep this exposure consistently overlook the real costs of their strategy: Hedging by owning extra reserves

ties up capital and does not optimize the use of the generation capacity

Hedging by counting on market reserves to mitigate the cost of buying replacement power is speculative exposure to volatility risk

What kinds of clients are using ELPRO cover? To a utility’s insurance risk manager, ELPRO is a tailored form of business interruption protection without property damage requirements to trigger, long waiting periods to retain, or lengthy claim adjustment negotiations. To a trading risk manager, ELPRO is a “just in time” call option on a power price or spread priced at a discount reflecting the contingent nature of the trigger event.

Some examples of how ELPRO is used by power producers and traders: A European power producer wants

to take operating risk out of a business unit’s operating profits – ELPRO guarantees the margin even if the plants cannot operate as planned

In the US, an ERCOT power trader is offered an attractive discount from a producer who wants to sell without guaranteeing availability from a particular unit – ELPRO backs up the plant’s production to enable a successful deal

An Australian power producer wants to fully contract generating capacity for a season to take advantage of high medium-term prices – ELPRO hedges the risk of being short in a rising market if an outage occurs

Chart 1: Margin volatility is growingSpark spreads in the UK and Belgium since 2014

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BEL spark spread in EUR per MWhUK spark spread in GBP per MWh

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Swiss Re Corporate Solutions provides risk transfer solutions to large and mid-sized corporations around the world. Its innovative, highly customised products and standard insurance covers help to make businesses more resilient, while its industry-leading claims service provides additional peace of mind. Swiss Re Corporate Solutions serves clients from offices worldwide and is backed by the financial strength of the Swiss Re Group. For more information about Swiss Re Corporate Solutions, please visit corporatesolutions.swissre.com or follow us on Twitter @SwissRe_CS.

© 2020 Swiss Re. All rights reserved. corporatesolutions.swissre.com

How does ELPRO work? Imagine a sudden outage or de-rating. If power prices are benign, the loss may be very modest. However, if a power outage occurs at the same time as prices are spiking, then producers could be exposed to substantial losses which can accumulate quickly. The 90-day outage shown below (see chart 2) would cost the producer GBP 5 727 600 in lost profit given the spreads prevailing at the time.

With ELPRO, the insured producer is paid the total of the lost production times the prices – or spreads – that were in place at the time of the outage. Subject to the pre-agreed limits of the contract, payment continues until the outage is over.

ELPRO cover is underwritten for each deal’s own risk, instead of priced across a pool of loss experience, like insurance. Therefore, lower risk means lower premium.

Finally, the claims process is fast and efficient and the payout is prompt, since settlement formulas are pre-agreed.

Our team Operating from our offices in Houston,London, Luxemburg, New York, Sydney and Zurich, our highly-skilled and experienced team designs ELPRO cover to best fit any client‘s situation. Over the years, our dedicated underwriters have structured ELPRO solutions for more than 100 GW of power generation across the globe.

Contact us today to learn moreFor more information about the Weather & Energy team and the wide array of innovative services and solutions we can offer, please contact:

Brian BeebeHead of Origination North AmericaTelephone +1 713 552 2306Brian_Beebe@swissre.com

Stuart BrownHead of Origination Europe, Middle East, Africa & Asia PacificTelephone +352 27 00 20 21Stuart_Brown@swissre.com

Chart 2: Outages are expensivePotential profit margin losses in 90-day outage

Features of our ELPRO cover Dual trigger volume and price

protection Product tailored to specific

client needs No physical damage required Can cover for risks of power,

other commodities, generation (e.g. spark) margins

Fast and transparent index-based loss settlement

“Buys down” gap between start of loss event and business interruption inception

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Unplanned outage

UK spark spread in GBP per MWh

Strike

Lost profit

Days with Spark Spread > Strike

Lost Production in MWh

Spark Spread in GBP/MWh

Strike in GBP/MWh

Compensation paid by SR in GBP

15.09.2016 24 000 116.39 60 1 353 360 19.09.2016 24 000 159.87 60 2 396 880 24.10.2016 24 000 63.87 60 92 880 07.11.2016 24 000 85.71 60 617 040 08.11.2016 24 000 82.50 60 540 000 09.11.2016 24 000 81.15 60 507 600 14.11.2016 24 000 69.16 60 219 840

TOTAL Compensation in GBP: 5 727 600

Swiss Re Corporate SolutionsMythenquai 50/60P.O. Box8022 ZurichSwitzerland

Telephone +41 43 285 2121Fax +41 43 285 2999corporatesolutions.swissre.com

© 2020 Swiss Re. All rights reserved.

The information, materials and examples contained herein are provided for illustrative and informational purposes only, should not be relied upon by any person, and do not constitute an invitation, inducement, offer or commitment, or a solicitation of an offer or commitment, or any advice or recommendation, to enter into a (re)insurance contract or derivative or other financial instrument by Swiss Re Corporate Solutions Global Markets Inc., Swiss Re Capital Markets Limited (SRCML), Swiss Re Capital Markets Europe S.A. (SRCME), Swiss Re International SE (SRI), Swiss Re Corporate Solutions Ltd (SRCSL) or any other company within the Swiss Re Group. SRCML of 30 St. Mary Axe, London EC3A 8EP is a company incorporated under the laws of England and Wales with registered number 03436761 and is authorized and regulated in the United Kingdom by the Financial Conduct Authority (Financial Services Register number 187863). SRCME of 2 rue Edward Steichen, L-2540 Luxembourg is a company incorporated under Luxembourg law and registered under R.C.S. number B228476 and is supervised in Luxembourg by the Commission de Surveillance du Secteur Financier and the Commissariat aux Assurances.

SRI of 2 rue Edward Steichen, L-2540 Luxembourg is a company incorporated under Luxembourg law and registered under R.C.S. number B134553 and is supervised in Luxembourg by the Commissariat aux Assurances.