Weather risk transfer a billion dollar opportunity for wind power

GCube Underwriting Ltd. (GCube) has underlined the significant financial impact wind speed volatility can have on wind energy stakeholders throughout the world, highlighting the potential for insurance, reinsurance, and insurance-linked securities (ILS) players to capitalise on that sector’s billion-dollar opportunity.

According to renewable energy underwriter, GCube, a lack of efficient and effective weather risk transfer in the wind energy sector has resulted in stakeholders in the space being left with as much as $56 billion in untapped asset values, worldwide.

In a recent report titled “Gone With the Wind: An Asset Manager’s Guide to Mitigating Wind Power Resource Risk,” GCube says that the underperformance of wind energy resources, which is driven by unforeseen and widespread climatic phenomena, is now the main driver of wind energy projects failing to achieve expected results.

This suggests that insurance, reinsurance, and ILS market players have an opportunity to develop innovative, adequate solutions that address the billion-dollar issue, something that has happened for other insurable aspects of the wind power industry.

A reduction in expected wind speeds means that wind energy producers and utilities have seen their financial performance dip, which has resulted in ratings downgrades, says GCube.

“As the wind energy sector has matured, a number of the main threats to profitability have increasingly been managed. The reliability of turbine and other technologies has rapidly improved, and the risk of malfunction or damage to them has been covered by more traditional insurance products,” said Geoffrey Taunton-Collins, Weather Risk Analyst, GCube, and co-author of the report.

“Now, the industry has realised that underperformance represents the single biggest remaining challenge that stakeholders face during the lifetime of a project. With the recent rise in refinancing, and significant M&A activity predicted for the first half of 2017, particularly in the United States, meeting the resource risk challenge has moved up the agenda as the sector wakes up to the substantial opportunities transferring weather risk effectively can provide for value creation.

“Coupled with important recent breakthroughs in the structuring of the product itself, this is creating serious momentum for the Weather Risk Transfer market,” continued Taunton-Collins.

Weather risk transfer solutions are able to provide protection for periods of unexpected underperformance of wind farms, for example, which increases profit stability and can improve reputations and return stability.

The ILS fund market has often provided capacity to back weather derivatives and other weather index linked risk transfer or reinsurance arrangements, with firms like Nephila Capital and Coriolis Capital being especially active in the weather hedging space for many years.

The ILS market, along with the more traditional insurance and reinsurance industry, has an opportunity to provide adequate weather risk transfer to the wind energy sector, especially with regards to lower than anticipated wind speeds.

This area of the wind energy market appears to be underserved, and GCube’s analysis and report highlights a substantial $56 billion in untapped asset values.

Underlining the importance and benefits of weather risk transfer for wind power, GCube explained; “GCube estimates that, for a 50MW onshore wind farm worth USD 80 million, successfully mitigating or transferring weather risk could achieve a total Net Present Value (NPV) increase of USD 5.8 million. By comparison, the same 50MW asset with comprehensive Operational All Risks (OAR) insurance coverage in place is likely to see just USD 1.5 million on average of financial losses throughout its lifetime attributed to technical failure and associated downtime.”