Renewable energy focused underwriting specialists, GCube Underwriting Ltd. (GCube), has launched a new weather risk transfer product for the wind and hydroelectric energy sectors, an area that increasingly reinsurance and insurance-linked securities (ILS) players seek to tap into.
“While intermittency is a given for the renewables sector, as the proportion of clean energy generation in the global energy mix continues to grow, so too does the financial and supply risk posed by the inherent volatility of the resources that make it possible,” advises GCube.
As is the case with many weather related exposures, the risks have the potential to be far-reaching and highly damaging to businesses and economies. And for the renewable energy segment the situation is much the same, and not just for renewable energy producers says GCube, as increasingly the entire value chain requires some mitigation “against the financial impact of resource volatility.”
As the renewable energy sector grows and developments are made in the establishment and advancement of hydroelectric and wind energy capabilities, the companies that operate such projects are increasingly susceptible to the impacts of extreme weather patterns, which can significantly dent the profitability of long and short-term projects, explains GCube.
An example of this, explains GCube, can be seen in the U.S. during 2015, where numerous wind market operators and utilities “felt the performance impact of the lowest Q1 wind speeds since records began, and low wind speeds are set to continue throughout the remainder of 2015.”
Furthermore, “long-term drought and low rainfall conditions in Uruguay and Brazil have hampered hydroelectric production and forced national governments to turn to costly spot market power,” explains GCube, again highlighting the impact this can have on profitability.
Attempting to navigate the challenging environment and to help mitigate profitability uncertainty has seen wind and hydroelectric producers seek alternative ways of “smoothing” profits says GCube, with weather risk mitigation well suited to the reinsurance and ILS markets’ knowledge, skillset and capacity.
While weather risk hedging products such as weather derivatives, swaps, index-linked insurance products and even catastrophe bonds exist across numerous weather perils and affected sectors, a lack of reliable performance and weather data and the inherent challenges of providing rapid pricing estimates for buyers, has hindered the development of weather risk hedging structures in the renewable energy landscape.
But this is where GCube’s new weather risk transfer product can help to change the trend, and could further open an avenue for traditional and third-party investors from the insurance, reinsurance, ILS and capital markets to develop risk financing structures for the complete value chain.
This includes developers, installers, independent power producers, utilities, pension funds, national governments and of course, the renewable energy producers themselves.
According to the renewable energy underwriting specialists the product “benefits not only from a marked increase in the availability of high-quality third-party weather data in the market, but also from a unique rating model that allows GCube to provide an early indication of pricing.”
From the data GCube then establishes a buyer specific weather risk transfer contract, customized to protect against the relevant weather exposure for each individual buyer.
Similar to a weather-exposed catastrophe bond or insurance product that utilises a parametric trigger, the buyer and GCube agree on a contract period and the agreed weather variable that can trigger payment, such as “wind speeds falling below 70% of the calculated long-term average,” explains GCube.
“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,” said Senior Underwriter at GCube, Charlie Richardson.
Weather risk insurance products like this from GCube will enable greater investment into the renewable energy sector, offering energy producers and the entire value chain greater protection against the world’s adverse, variable and unpredictable weather patterns.
Furthermore, with pricing in the global insurance, reinsurance and ILS markets remaining under pressure and firms increasingly searching for diversified and new business lines to access returns, the ability to more adequately and sufficiently model and price the risks surrounding the weather impacts on the renewable energy industry will increase investor appetite for the risks.
In fact ILS players are increasingly looking to weather risk transfer as a potential new diversifier for their portfolios, with a number of managers already active and more seeking to become so. ILS capacity backs many of the world’s largest weather risk transfer deals already and this is expected to increase in the years to come.
Of course the key to growing the uptake of weather risk transfer products is often the sales pitch, something which to date has been found to be lacking at times with the need for broker education one of the reasons the weather risk transfer market has not taken off as it perhaps should have.
“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. This will bring about smooth profitability and, ultimately, encourage fresh investment into the market,” concluded Richardson.