Nephila & Allianz back wind farm revenue swap for Enel

Insurance-linked securities (ILS) and reinsurance linked investment manager Nephila Capital has again collaborated with insurer Allianz and broker ReSurety to deliver a wind farm proxy revenue swap product to transfer risks and support cash flows related to a new wind farm construction project.

This wind farm proxy revenue swap transaction is the largest by capacity for a single wind farm anywhere in the world, covering 295 MW or production capacity.

Italian renewable energy firm Enel, through U.S. subsidiary Enel Green Power North America, Inc., is in the process of constructing a roughly 450 MW wind farm named High Lonesome in Upton and Crockett Counties, Texas.

Weather is one of the main risks that wind farms and other renewable energy projects face, with lack of wind for power production a serious threat to the financial viability of major projects and one that can make it hard to finance the enormous investments required.

Enter the Proxy Revenue Swap (PRS) a risk transfer product that acts as a tool for hedging wind volume risks at wind farms, allowing owners and investors to secure more predictable revenues and mitigate power generation volume uncertainty caused by a lack of wind resources.

Created by ReSurety alongside Allianz Global Corporate & Specialty (AGCS) and its Alternative Risk Transfer unit (ART), and Nephila Climate, the weather and climate risk and reinsurance focused unit of ILS fund manager Nephila Capital, the revenue swap is gaining traction with renewable energy project owners around the world.

In this case Allianz ART will have acted as insurer for the hedging transaction, while Nephila acts as a source of reinsurance capital and absorbs the weather risks into its ILS funds, with the support of ReSurety who help in structuring these transactions.

The proxy revenue swap covers a 295 MW portion of the wind farm’s output, hedging it in order to minimise price and weather-related risks.

“The start of construction of our largest wind project to-date represents a major commitment to growing our business in the US and specifically in Texas,” commented Antonio Cammisecra, Head of Enel Green Power. “The project underscores our ability to work with partners to tailor energy solutions to fit their needs and continue to manage and deliver to our customers the complex deals necessary in today’s evolving energy market. We look forward to continuing to serve as the partner of choice, dedicated to delivering a sustainable energy future.”

The High Lonesome wind farm investment amounts to roughly $600 million, financed by Enel itself. The proxy revenue swap provides an important risk transfer and mitigation tool, giving Enel greater certainty in its investment during the construction phase and then smoothing production revenues after the launch.

The proxy revenue swap is a financial derivative structure which offers the benefits of stabilising revenues for the project, no matter how power price fluctuates or weather patterns impact production, hedging shape risk as well as price and volume risk, lowering uncertainty for investors and project owners.

The High Lonesome wind farm will receive fixed payments based on the expected value of future energy production, with adjustments paid based on differences between project revenues and fixed payment.

“The construction of High Lonesome is a strong testament to the popularity and success of innovative renewable energy protections,” Karsten Berlage, Managing Director, Allianz Risk Transfer, said. “The majority of today’s stakeholders champion the continued growth of renewables and that is why Allianz is committed to flexible strategies such as the PRS that mitigate those risks – long term.”

“Renewable energy projects are under increasing pressure to deliver predictable returns despite the increasing volatility of the value of intermittent generation,” added Lee Taylor, Co-Founder and CEO, REsurety. “We developed the Proxy Revenue Swap specifically to deliver unrivalled certainty of cash flows, regardless of power price volatility and weather-driven intermittency. We are delighted to have had the opportunity to collaborate with Enel, Allianz and Nephila to bring the largest PRS transaction to fruition.”

These wind farm risk transfer transactions are an innovative mix of financing and reinsurance hedging to provide greater certainty to the burgeoning renewable energy sector.

The same financial technology has also been applied in the solar power space as well.

For Nephila Capital and its investors, the underlying weather-related risks it assumes through its support for these deals helps to augment its weather-risk linked investment strategies.