weather risktransfer · coverage for all renewable energy risks. with over 25 years’ experience...

The problem

As the proportion of renewable generation in the global energy mix continues to grow, so too does the financial risk posed by the inherent volatility of the resources that make it possible. This risk affects not only renewable energy producers, but also an ever-increasing number of players throughout the value chain – from developers, installers and independent power producers to utilities, pension funds and national governments.

The financial performance of any business is tied directly to the availability of its goods and services. Success is also governed by external factors such as variable currency exchange rates, interest rates and commodity prices.

For businesses and entities working in the renewable energy sector, the single greatest and most significant factor influencing availability and performance is weather. Wind and hydroelectric generators, in particular, face a persistent challenge as they look to manage the intermittency of wind and water resources.

Year in and year out, these firms must come to terms with variable weather conditions that cause volatility in generation output and, as a result, impact revenues. In recent years, the German wind market has recorded significant annual variations in wind volume both below and above long-term averages:

Weather Risk Transfer:

Hedging Strategies for Hydroelectric and Wind Energy Investors

Our Knowledge, Your Power

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Renewable Energy Insurance

Likewise, long-term drought conditions in established hydroelectric markets such as Brazil have contributed to nationwide generation shortfalls.1 In both cases, resulting cash flow fluctuations have contributed to unstable enterprise value and affected the perception of credit risk amongst capital providers.

Variance from 30-year average annual wind resource in Germany by percentage. Positive and negative percentages illustrate increase and decrease in wind resource from the average (0%), respectively. Based on a representative sample over a 10-year period. Source: www.uwig.org/iea_report_on_variability.pdf and ‘De-risking Wind Energy Projects: Expectations, Reality & Solutions’ authored by Nephila Capital Ltd.

1 http://www.lloyds.com/~/media/lloyds/reports/360/360%20climate%20reports/fbdsreportonbrazilclimatechangeenglish.pdf

Stabilising cash flows

Increasingly, this uncertainty has led wind and hydroelectric energy generators to seek an alternative profitability smoothing method by transferring weather risk to a counterparty via a financial hedge.

Hedge Buyer (Transfers Weather Risk)

Hedge Seller(Accepts Weather Risk)

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Insures Risk

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Guarantee a floor on financial performance by hedging adverse weather

Hedged

( - ) adverse weather results

( + ) good weather results

Unhedged

Unhedged and hedged revenues for wind and hydroelectric companies

Furthermore, the unique rating model offered by GCube and better access to critical weather data across the industry now makes it more straightforward than ever to provide upfront pricing estimates for the potential buyer.

For companies that depend on weather for their production, hedges offer vital protection against cash flow fluctuations by means of compensation in the eventuality of below or above par resource availability.

Indeed, conversations with market participants confirm that many project stakeholders are keen to stabilise future cash flows and are therefore willing to accept a slightly lower upside by paying an insurance premium to minimise the impact of adverse weather on revenue.

In response to this market demand, GCube Underwriting Ltd. and GCube Insurance Services Inc. (GCube) are pleased to offer a weather hedge mechanism for the wind and hydroelectric energy markets, enabling buyers to guarantee a floor on financial performance and thereby unlock additional value for projects and their stakeholders.


LocationFirstly, an appropriate weather data source is chosen as close as possible to the location of the buyer’s exposure, for the purpose of settling the hedge contract. This data is measured and maintained by an independent third party to provide transparency for both the buyer and GCube.

Contract PeriodNext, the buyer defines the duration of the contract. The contract period can range from months, to seasons, to multiple years. The duration can be chosen to match other financial obligations and hedges that the buyer already has in place.

Weather VariableGCube and the buyer then determine a relevant weather variable for the exposure, such as wind speed for a wind energy company and river flow for a hydroelectric energy company.

Index TriggerGCube subsequently uses historical weather data to create a suitable index and index trigger that:

• Determines when payment to the buyer occurs• Minimises basis risk between observed weather and financial performance

Index-based coverage allows rapid deal settlement since the payment structure is pre-agreed and can be calculated as soon as weather data is available – typically within days of contract expiry. This index-based approach also requires no proof of financial loss from the buyer.

Payment per Index UnitFinally, the buyer specifies the notional payment per index XQLW WKH\�ZDQW to receive, up to a specified contract limit. Limits range in size from hundreds of thousands to hundreds of millions of US dollars, or other agreed currency.

Throughout the duration of the hedge, the observed index values are calculated daily. If the agreed trigger is breached, payment is due to the buyer. The size of the payment is proportional to the departure of the observed weather index from the trigger, up to the contract limit.

Tailored to your needs

The GCube weather hedge is customized in each case to the buyer’s specific weather exposure. However, all weather risk transfer contracts have common terms and follow a common structure:

Flexible contract delivery

With the support of its industry partners, GCube offers a choice of delivery mechanisms for the hedge, depending on the client’s preferences. Weather hedging services can be delivered:

• In the form of a Derivative or Re/insurance – with an S&P AA- rated insurer• On Lloyd’s of London syndicate paper (S&P rating A+)

Contact GCube to discuss which structure best suits your weather exposure.


The price of the hedge depends on the underlying nature of the weather risk that is transferred. Typically, more frequent weather events – which result in more frequent payments to the buyer – are more expensive to hedge.

Some contract structures require no upfront premium from the buyer – these often take the form of cash flow swaps or collars whereby a wind or hydroelectric energy company receives payment from the seller when ‘bad’ weather occurs and pays the seller when ‘good’ weather occurs.

GCube is a leading provider of insurance services for renewable energy projects in wind, solar, biofuels, wave, hydro and tidal around the globe.

Its speciali]ed focus and robust underwriting authority offers unparalleled marine, property, liability and political risk insurance coverage for all renewable energy risks. With over 25 years’ experience in the renewable energy sector, GCube understands the unique exposures of these power generation projects and assists its clients in identifying, quantifying and mitigating risk efficiently and economically while helping them achieve their business objectives.

To learn more about how we can support your insurance coverage requirements, please visit our website at www.gcube-insurance.com.

www.gcube-insurance.com

Renewable Energy Insurance


Newport Beach Office 100 Bayview Circle - Suite 505 Newport Beach, CA

92660 USA+1.949.515.9981

London Office155 Fenchurch Street

LondonEC3M 6AL

+44 (0)20 7977 0200

New York Office420 Lexington Avenue

Suite 1640New York, NY 10170+1.212.863.2211

St. Paul Office345 St. Peter Street

Suite 1300St Paul, MN 55102+1.651.621.8885

GCube® is a leading provider of insurance services for renewable energy projects in wind, solar, biofuels, biomass, wave, tidal, hydro and geothermal around the globe. Our specialised focus and underwriting authority offers comprehensive property and liability insurance coverage for transit, construction and operational risks.

Authorised and Regulated by the Financial Conduct AuthorityGCube® is a registered trademark of GCube Underwriting Ltd.

© 2015 GCube Underwriting Ltd.

Weather Risk Transfer Case Study

Managing low river flow exposure for a New Zealand hydroelectric energy company



A hydroelectric energy company in New Zealand is exposed to low water levels. The energy company buys protection that provides compensation when annual river flow is low (below the 15th percentile of historical flow).

Estimated Revenue (NZD) 31,300,000

Good Water Yr (+%) 25%

Bad Water Yr (-%) -20%

GWY Revenue Incr (NZD) 7,825,000

BWY Revenue Decr (NZD) (6,260,000)

Estimated Weather Impact on Financials (for Power Station #1)

Analysis of the energy company’s financials and historical river flow data suggests the following contract terms. The energy company can purchase 1, 3, or 5 year protection. Prices shown are annualized. All contracts settle annually (within days of year end) based upon measured river flow during the period.

Portfolio-1Yr Portfolio-3Yr Portfolio-5Yr

Inception 1/1/2015 1/1/2015 1/1/2015

Expiry 12/31/2015 12/31/2017 12/31/2019

Index Trigger in Percentile

15.0% 15.0% 15.0%

Index Trigger in m3/s 127,458 127,458 127,458

Notional (NZD/m3/s) 100 100 100

Annual Limit (NZD) 6,500,000 6,500,000 6,500,000

Aggregate Limit (NZD) -- 13,000,000 19,500,000

Premium - 1yr Price 508,000 429,000 391,000

Contract terms (for Power Station #1)

2014

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Annual River Flow (m3/s) - Power Station #1

Trigger Annual Flow

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Historical Contract Payoffs to Buyer - Power Station #1

Historical river flow, proposed contract trigger, and historical payoffs (for Power Station #1)

Financial and weather parameters can be refined to meet buyer’s price and risk retention preferences:

• Financial parameters: Contract length; contract deductible;maximum contract payment (limit); notional payment per weatherindex

• Weather parameters: weather variable (river flow1); index trigger

Potential benefits of the river flow protection:

• Offsets costs of unmet demand when water supply is low• Stabilizes electricity prices for customers of energy company

1 Rainfall or snowpack is also possible


Managing drought exposure for a Canadian hydroelectric energy company



A hydroelectric energy company in Canada is exposed to low water levels. It has two power stations near each other on the same river. The energy company buys protection that provides compensation when annual rainfall is low (below the 20th percentile of historical rainfall).

Estimated Revenue (CAD) 1,200,000

Good Water Yr (+%) 15%

Bad Water Yr (-%) -15%

GWY Revenue Incr (CAD) 180,000

BWY Revenue Decr (CAD) (180,000)

Estimated Weather Impact on Financials (for Power Stations #1 & #2 combined

Analysis of the energy company’s financials and historical rainfall data suggests the following contract terms. The energy company can purchase 1, 3, or 5 year protection. Prices shown are annualized. All contracts settle annually (within days of year-end) based upon measured rainfall during the period.

Portfolio-1Yr Portfolio-3Yr Portfolio-5Yr

Inception 10/1/2015 10/1/2015 10/1/2015

Expiry 9/30/2016 9/30/2018 9/30/2020


20.0% 20.0% 20.0%

Index Trigger in mm 2,839 2,839 2,839

Notional (CAD/mm) 350 350 350

Annual Limit (CAD) 250,000 250,000 250,000

Aggregate Limit (CAD) -- 500,000 750,000

Premium - 1yr Price 36,700 23,300 22,000

Contract terms (for Power Stations #1 & #2)

3,500

0 500

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4,000 4,500

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Annual Rainfall (mm) - Power Station #1 & #2

Trigger Annual Flow

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Historical Contract Payoffs to Buyer - Power Station #1 & #2

Historical rainfall, proposed contract trigger, and historical payoffs (for Power Stations #1 & #2)


• Financial parameters: Contract length; contract deductible;maximum contract payment (limit); notional payment per weatherindex

• Weather parameters: weather variable (rainfall1); index trigger

Potential benefits of the river flow protection:

• Reduces upfront cash reserves allowing some capital to beredeployed elsewhere within energy company

• Offsets cost of generating electricity with alternative fuel sourcesduring drought.

1 River flow or snowpack is also possible


Protecting a portfolio of wind energy projects in the UK



A wind energy company in the UK has four wind farms (50 turbines each) in different locations and would like to protect its entire portfolio of wind assets. The energy company buys protection that provides compensation when power generation is low (below the 10th percentile of historical generation). Historical wind speed data and the turbine manufacturer’s power curve are used to derive a proxy power generation index.

Estimated Revenue (GBP) 18,465,500

Good WLQG Yr (+%) 25%

Bad WLQG Yr (-%) -25%

GWY Revenue Incr (GBP) 4,616,375

BWY Revenue Decr (GBP) (4,616,375)

Estimated Weather Impact on Financials (for portfolio of wind farms)

Analysis of the portfolio financials and historical power generation suggests the following contract terms. The contract covers all four locations, with individual triggers and limits for each. The energy company can purchase 1, 3, or 5 year protection. Prices shown are annualized. All contracts settle annually (within days of year end) based upon measured power generation during the period.

Location Wind Farm 1

Wind Farm 2

Wind Farm 3

Wind Farm 4

Portfolio-1Yr

Portfolio-3Yr Portfolio-5Yr

Inception -- -- -- -- 1/1/2015 1/1/2015 1/1/2015

Expiry -- -- -- -- 12/31/2015 12/31/2017 12/31/2019


10.0% 10.0% 10.0% 10.0% -- -- --

Index Trigger in MWh

259,134 295,127 275,240 246,356 -- -- --

Notional (GBP/MWh)

40 40 40 40 -- -- --

Annual Limit (GBP)

1,500,000 2,000,000 1,000,000 2,500,000 7,000,000 7,000,000 7,000,000

Aggregate Limit (GBP)

-- -- -- -- -- 14,000,000 21,000,000

Premium - 1yr Price

-- -- -- -- 671,000 539,000 533,000

Contract terms (for portfolio of wind farms)

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Historical Wind Generation (MWh) - Wind Farm #1

Trigger Annual Generation

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Historical Contract Payoffs to Buyer - Wind Farm #1

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Historical Wind Generation (MWh) - Wind Farm #4

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Historical Contract Payoffs to Buyer - Wind Farm #4

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Historical wind generation, proposed contract trigger, and historical payoffs (example for wind farm #4). The profile for each wind farm is variable, each with payoff triggered three or more times during the period. Total portfolio payoffs are simply the sum of payoffs across all four wind farms.


�� )LQDQFLDO� SDUDPHWHUV�� Contract length; contract deductible; maximum contract payment (limit); notional payment per weather index

�� :HDWKHU�SDUDPHWHUV��weather variable (wind, synthetic generation); index trigger

Potential benefits of low wind generation protection:

�� Increases certainty of future cash flows for project investors�� Improves efficiency of capital structure via less conservative cash

flow assumptions from lenders

weather risktransfer · coverage for all renewable energy risks. with over 25 years’ experience...

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