Nephila & Allianz’s Enel wind farm proxy revenue swap comes on-risk

Nephila Capital, the largest investment manager of insurance and reinsurance linked securities, is a regular participant in wind energy proxy revenue swap deals, alongside transaction partner Allianz Risk Transfer (Allianz ART).

Nephila Climate, the weather and climate risk and reinsurance focused unit of the largest ILS fund manager Nephila Capital, regularly transacts complex wind farm financing transactions, acting as a risk transfer partner to take weather risks out of the equation for operators and investors in renewables projects.

Nephila has long been involved in the weather and climate risk transfer market, be that through provision of reinsurance capacity to support catastrophe and weather related risks, or these more complex financial arrangements that help renewable energy providers, or others exposed to climate related risks, to hedge out specific weather risks and reduce volatility associated with renewable energy projects, assets or revenues.

These transactions, dubbed proxy revenue or generation swaps, provide greater certainty to investors, operators and the construction of renewable energy projects, by hedging out weather related supply and volume risk, in this case wind, but they can also apply to solar power projects as well.

Nephila Climate teamed up with its long-time partner on this transaction in early 2019, as Allianz Global Corporate & Specialty’s (AGCS) Allianz Risk Transfer (ART) unit took on the risk outside of the weather related component for this deal.

The beneficiary of this arrangement is Enel Green Power North America, an owner and operator of renewable energy plants in North America and Canada.

This transaction is specifically for the High Lonesome wind farm in Upton and Crockett Counties, Texas, the largest operating wind energy facility in Enel’s global renewable portfolio.

High Lonesome has now begun its operations, with 450 MW of energy production possible and another 50 MW expansion also slated in the near future and further growth of the project also likely.

The energy produced by a 295 MW portion of the High Lonesome wind farm project will be hedged under a Proxy Revenue Swap (PRS) with Allianz ART and Nephila Climate, to help smooth revenues and manage production volume expectations.

The proxy revenue swap enables Enel to hedge out risk and production variability related to the wind farms weather-driven fuel source, as well as to manage power price volatility. Ultimately they are a tool that helps to smooth expected earnings from wind power project investments, or other projects where weather is a source of energy input.

It’s a financial derivative driving revenue stabilisation regardless of power price fluctuations and weather-driven intermittency, hedging the High Lonesome wind farm from this kind of risk as well as risks associated with price and volume.

High Lonesome will benefit from fixed payments based on the expected value of future energy production, with adjustments made depending on how the realized proxy revenue of the project differs from the fixed payment.

This proxy revenue swap is the largest by capacity for a single wind energy plant globally and was the first agreement of its kind for Enel.

Now operational, the wind farm proxy revenue swap will be on-risk for variability in the wind supply and output of the plant.

Allianz ART and Nephila Climate worked with specialist renewables focused broker REsurety, Inc. on the deal, who provided the risk analytics needed to support the transaction and will serve as the calculation agent on an ongoing basis.

These wind farm risk transfer transactions are an innovative mix of financing and reinsurance style hedging, offering greater certainty to the burgeoning renewable energy sector’s investments. The same financial technology has been successfully applied in the solar power space as well.

They allow renewable energy project shape, price and volume risk all to be hedged, reducing uncertainty for investors and project owners.

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