Insurance linked asset manager Nephila Capital and alternative product specialist insurer and reinsurer Allianz Risk Transfer have partnered to deliver an innovative weather hedging product for a wind farm, in the form of a 10-year Proxy Revenue Swap.
The largest manager of catastrophe and weather insurance or reinsurance linked investments Nephila Capital worked alongside Allianz Risk Transfer (Bermuda) Limited, the ART focused unit of insurance and reinsurance group Allianz, with the support of volumetric risk analysis firm REsurety, Inc. and energy management network Altenex LLC, in order to create and commercialise this wind farm volume hedging product.
Nephila, Allianz Risk Transfer and partners have developed the Proxy Revenue Swap as a tool for hedging wind volume risks for wind farms. Allianz Risk Transfer has executed this 10-year Proxy Revenue Swap transaction with Capital Power’s 178 MW Bloom Wind Farm, which is due to be constructed near Dodge City, Kansas.
The 10-year swap agreement will secure the wind farm owners long-term predictable revenues and mitigate any power generation volume uncertainty that the Bloom Wind Farm faces due to any lack of wind resources.
“This new product line for the wind power industry will enable more efficient and cost-effective financing of wind generation projects,” commented Karsten Berlage, Managing Director of Allianz Risk Transfer.
Utility-scale wind farm construction projects have high upfront costs attached, meaning it is important that investors can secure long-term and stable revenues to justify the investment made.
By hedging wind risk the wind farm and its investors can smooth revenue and earnings volatility due to the weather, receiving payouts when wind is insufficient to support the generation volumes targeted.
The newly developed wind hedging product, the Proxy Revenue Swap, provides a new way for the wind power industry to manage its revenues, stepping away from the more traditional price-focused hedging solutions.
The product is similar in concept to a tolling agreement or capacity payment, swapping the floating revenues of a wind farm, which are driven by the hourly wind resource and power prices, for a fixed annual payout.
Thus resulting in revenue certainty for the investors and an effective hedge for wind variability as well. This deal is the first in what Allianz Risk Transfer terms “a robust pipeline of future wind financings” and is also applicable to wind farm markets outside of the United States on a global basis.
Berlage explained some of the unique features of this wind swap product; “Recent advances in data availability for the US wind market as well as in risk assessment and modeling allowed this unprecedented scope of risk transfer within a single product, which is available for up to 10 years.
“In contrast to more short-term and price-focused hedging approaches, for the first time price and wind volume risks of a wind farm have been managed at the tenor needed to support a project’s capital structure and balance sheet. The result is a level of revenue certainty never before available to the wind industry.”
The development of the wind swap product was a true partnership approach, with Allianz Risk Transfer and Nephila bringing their collective weather risk transfer expertise to bear, as well as both utilising their insurance and reinsurance risk capacity, underwriting sophistication and credit strength, to facilitate the transaction.
We’d assume that Allianz fronted the transaction and both parties took a share of the risks involved. Nephila and Allianz have been working in partnership on weather and catastrophe risk transfer and re/insurance transactions for many years.
REsurety provided specialist risk analysis needed for the structuring of the Proxy Revenue Swap and also provides ongoing services as the calculation agent for the transaction. Altenex, meanwhile supports the management of power price-linked risk as part of the Proxy Revenue Swap transaction structure.
Allianz Risk Transfer and Nephila have been working with REsurety since 2012 on the development of risk transfer products for the wind power industry. As a result of the more recent partnership between REsurety and Altenex in 2015, protection against low wind output has been expanded to include power price risk as well as generation volume-linked risk exposures, providing a more holistic risk management solution to wind farm owners.
ILS investment manager Nephila Capital has provided capacity for wind farm hedges in the past. However, this new product looks to more closely link the potential downside associated with wind risk for wind farm investors and owners, with their revenues, which should help to increase the attractiveness of such products.