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ICAP completes reinsurance backed solar weather derivatives deal


ICAP, part of the TP ICAP group which is one of the largest interdealer brokers in the world, has completed what it is calling a landmark deal in the weather derivatives market, by directly connecting a renewable energy provider and a reinsurance capital provider using a fixed agreement, for the first time.

ICAP said that it brokered the innovative solar derivative deal in Australia, which has enabled an Australian utility company to lock in a fixed price for the electricity generated by its solar plant, with the volume of power in the trade determined by the amount of sunshine on the day.

In doing this, the structure provides the Australian Utility with the certainty of a fixed price in a market that can be highly volatile, helping it to effectively manage investment in the solar plant.

The reinsurance capital provider, meanwhile, benefits from exposure to the variability in sunshine and power prices, which ICAP notes helps it to diversify its risk exposure across different weather elements and regions.

Weather derivative trades like this can help market participants to diversify their risks, increase investment in the renewable energy industry and at the same time accelerate the transition to a low-carbon economy.

In this case the provider of reinsurance capital is said to be a company, but of course some insurance-linked securities (ILS) have a track-record and appetite for assuming weather derivatives related risks, so it could as easily have been backed by an ILS market participant it seems.

The renewable energy focused utility gains greater certainty in the performance of its solar farm, by hedging out some of the solar variability risk associated with its production of energy.

Kellee Campbell, Divisional Director, Energy and Commodities ICAP Australia, commented, “This deal highlights that, with the changing generator stack in Australia, weather is set to play an even more important role in generation outcomes and the way in which portfolios manage risk. Along with ICAP Australia’s well-established Electricity, Renewable and Gas market broking and data services, weather based structures is a valuable addition to our offering.”

Nick Ernst, Managing Director, Weather Markets, TP ICAP added, “At TP ICAP we aim to be the broker for the transition to a green economy, and a key part of that is breaking down the obstacles to renewable energy. The volatility of renewable energy sources such as solar plants, which are affected by changing temperature, sunshine, wind and precipitation, can act as a deterrent for investment. Transactions such as this are an innovative way to reduce the variability in the energy price received by the producer, effectively enabling market participants to hedge the risks in their business and support growth in the solar industry.”

TP ICAP recently also announced the launch of a new climate index which aims to make financial risk related to the rate of climate change tradable.

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