Weather risk the biggest threat to wind energy sector

Weather risk due to a lack of wind, or resource risk as its known in the sector, is the major threat to wind energy markets and wind farm operators, with the inability to transfer the weather risk adequately often leading to sub-par project performance, according to specialists GCube Underwriting Ltd. (GCube).

GCube underwrites renewable energy risks, including working in the weather risk arena where it is linked to the renewables sector in resource areas such as wind, wave, hydro and solar power.

The company previously underlined the significant financial impact wind speed volatility can have on wind power and wind generation stakeholders throughout the world, highlighting a billion dollar opportunity for insurance, reinsurance, and insurance-linked securities (ILS) markets to assist in transferring this wind energy related weather risk.

Now the company has released a new report looking at and ranking the main threats faced by onshore wind farm developers, owners and operators, finding that resource risk is the major risk and potential source of financial losses.

Across both established and developing wind energy markets around the world low wind speeds are negatively affecting wind energy and wind power assets ability to deliver on forecast energy output levels, meaning they fail to meet their pre-construction targets.

This can affect the investors in wind energy projects as well, as they often invest based on forecast levels of output which when not met can mean that their investment returns from wind farms underperform expectations.

“The inability to effectively transfer weather risk has led to numerous, high-profile examples of sub-par project performance,” GCube explains.

The negative impact of too little wind has been directly cited in the financial results of utilities and wind farm portfolio owners, GCube notes, as well as factoring into rating downgrades. Hence transferring this risk is advised.

GCube forecasts that weather will remain the most pressing risk to wind energy sector stakeholders for a number of years, and expects that this will drive an increased uptake of weather risk transfer solutions and products such as proxy revenue swaps, that help to guarantee financial performance by transferring the resource risk away.

In fact, GCube believes that weather risk transfer products will be essential in helping the wind energy sector to deal with an estimated $56 billion shortfall in total asset values across the globe.

Mechanical and electrical breakdown risk is the second most pressing concern, GCube says, which also could have some links to a reverse weather risk, where extreme wind speeds can be known to damage wind farm mechanics and cause outages.

In some markets natural catastrophe risks are also a concern for wind energy projects, their developers and owners, and GCube ranks extreme weather and natural catastrophe risks as the fifth most pressing threat to the wind energy sector globally.

Jatin Sharma, Head of Business Development at GCube, commented on the release of the latest data; “GCube’s data shows how the risk landscape is constantly changing, and the need for stakeholders to stay ahead of the curve if projects are to remain profitable.

“The insurance markets continue to develop new and improved means of protecting onshore wind developers and asset owners, both from the sudden and unforeseen impacts of mechanical breakdown, and the longer-term financial damage caused by resource-related project underperformance.

“But, with high-profile incidents of both still prevalent across the industry, it remains clear that there is absolutely no room for complacency when it comes to investing in thorough financial and technical risk management.”

Weather risk due to low wind speeds is the biggest single threat to wind farm and the wind energy sectors financial performance, making adoption of weather risk transfer products and capacity from the reinsurance and insurance-linked securities (ILS) sector vital.

“The vulnerability of asset owners worldwide to volatile wind speeds and spot prices has become abundantly clear as the industry has collectively struggled to maintain financial performance in recent years,” Sharma explained.

Additionally, “Extreme weather and NAT CAT risk will remain a persistent threat, and more effective mitigation measures may be required as the wind industry continues to expand into high-risk territories.”

The ILS market is already involved in some efforts to help wind farm operators and investors to mitigate revenue volatility, by transferring weather risk and helping to provide revenue swaps. ILS asset manager Nephila Capital is well-known for its activities in this area and its appetite to provide more capacity to protect the wind energy sector against what is its major threat today.

In fact, Nephila Capital and GCube Underwriting Ltd. have been working together since at least 2015 to offer weather risk transfer and proxy revenue swap products to global wind energy operators.

In order for the wind energy sector to offset this risk, reinsurance and risk capital is required with the capital markets well positioned to provide a growing contribution to this.

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