GCube, the renewable energy sector insurance underwriter, has launched a new Weather Risk Transfer mechanism to provide renewable energy project owners with a means to mitigate the financial impact of resource volatility. In this case the product covers wind and rain – or perhaps more accurately, a lack thereof.
According to GCube, the product has emerged from a number of high-profile anomalies in established hydroelectric and wind power markets that have raised industry awareness of the impact of extraordinary weather patterns on long and short-term project performance and profitability.
Certainly, in the past year long-term drought and low rainfall conditions in Brazil, California and elsewhere have had a significant impact on hydroelectric generation. Meanwhile, GCube notes that utilities and operators in the US wind market have been feeling the impact of the lowest first quarter wind speeds since records began - with low wind speeds apparently set to continue throughout the remainder of 2015.
As a consequence, generators reliant on these naturally variable resources are seeking to transfer weather risk to a third party by means of a financial hedge - a mechanism that offers compensation in the event of below par resource availability to guarantee a floor on financial performance.
Charlie Richardson, Senior Underwriter at GCube, explains: “Weather risk exposure is simultaneously an issue for the wind and hydroelectric industries at large and a project-specific concern for individual operators. That’s why each hedge contract and its delivery mechanism needs to be tailored specifically to the buyer’s needs, on the basis of reliable local data. Now that this data has become more widely available, we are able to start offering investors and project stakeholders in the wind and hydroelectric energy sectors a means of managing underperformance and its associated financial risk.”
The new products emerging from the insurance industry coincide with the commercial launch of a new wind-hydropower system on the Spanish-administered island of El Hierro in the Canary Islands, off the coast of Morocco.
Designed with the aim of making the island of 10,000 people the first to be able to supply its entire electricity demand using renewable energy, the EUR65 million project comprises a pumped storage system with an upper reservoir of 380,000 m3 located in the ‘La Caldera’ volcanic crater. Pumping plant comprising of two 1500 kW pump sets and six 500 kW pump sets - a total of 6 MW - will supply water to the upper reservoir for later use in a hydropower plant featuring four Pelton turbines of 2,830 kW each - a total 11.32 MW. In addition the system features five Enercon wind turbines with 2.3 MW of power each, a total of 11.5 MW, which powers the pumping system during periods when there is an excess of power.
And so it seems that while the financial engineering sector is hedging volatility with financial instruments, the island of El Hierro is using wind and hydropower to hedge the inherent volatility in each other. The effective result is the same - continued investment in the global hydropower sector and a continued shift towards a stable, low cost and low-carbon energy system.