Nephila adds new hedge for weather-driven renewable energy

Nephila Climate, the weather, climate risk and reinsurance focused unit of ILS fund management firm Nephila Capital, has added a new product to its suite of hedging solutions for operators of weather-driven renewable energy businesses.

Nephila has specialised in this sector for some years now, providing hedges to enable greater certainty on revenues and generation volumes for investors in, developers and operators of renewable energy projects that are powered by the weather.

It’s latest transaction, which we covered last month, saw the company take weather risks out of the equation for operators and investors in a recent wind farm financing transaction.

Now, Nephila Climate has revealed a little more about the transaction and the hedging product underlying it, which is termed a Proxy Generation Power Purchase Agreement (pgPPA).

The Scout Clean Energy wind farm financing deal is the first use of the Proxy Generation Power Purchase Agreement (pgPPA), which was transacted for its proposed 180-megawatt (MW) Heart of Texas Wind Farm, located in McCulloch County, Texas.

Scout Clean Energy secured its pgPPA with Allianz Global & Specialty, Inc.’s Alternative Risk Transfer unit, in partnership with Nephila Climate and with risk analytics provided by ReSurety to support this long-term offtake transaction who will also serve as the calculation agent for the life of the contract.

The pgPPA is the latest in a suite of risk management tools that Nephila offers buyers and sellers of renewable energy to manage risks associated with weather-driven renewable energy projects.

Typically these wind farm deals have featured a Proxy Revenue Swap (PRS) in the past, with now over 2GWs of PRS’s deployed in support of renewables projects.

The PRS guarantees a revenue amount, but the pgPPA guarantees a rate per MWh. This means the project retains exposure to P50 accuracy, a statistical level of confidence measure used in renewable energy related to the yield of a project.

As a result, the pgPPA structure offers the cashflow certainty that renewable energy projects need to support their financing, but does not require the project to pay for transferring any risk above the level that it prefers to retain.

“The renewable energy landscape continues to evolve, with buyers and sellers of clean energy having to manage increasingly large and complex risks,” explained Richard Oduntan, CEO of Nephila Climate. “In response to that need, Nephila Climate’s goal is to provide a holistic set of risk management tools to the buyers and sellers of clean energy. These tools enable our clients to pick and choose which risks they want to shed, and which risks they want to hold, which can change project by project. We’re delighted to be announcing the execution of this new structure with the Scout team a short few months after announcing our PRS transaction with them earlier this year.”

The new pgPPA structure is much more familiar for its intended users, being essentially the same as the popular Virtual PPA, or “vPPA” structure that corporate buyers know.

With the difference being in the underlying index that the instrument settles against, being a Proxy Generation index rather than the observed or metered generation.

Proxy Generation is an hourly index that specifies the volume of energy that a project would have produced if it had been operated as specified by the developer or owner, meaning hedges can be constructed to mitigate the financial impacts of lower than expected production.

Nephila Climate notes that using such a settlement mechanism helps to ensure aligned interests, meaning the offtaker doesn’t take on any undue financial exposure to the owner or operator’s decisions, such as when they plan to undergo maintenance or to install upgrades to the project.

“The success of structures like the Proxy Revenue Swap for project developers, and more recently the Volume Firming Agreement (VFA) for renewable energy buyers, clearly demonstrates that both buyers and sellers of clean energy are increasingly in search of tools to manage the volatility of intermittent generation,” Lee Taylor, CEO of REsurety added. “The pgPPA is simply the next iteration of a proven structure that enables each party to manage the risks that they are best equipped to hold.”

“We continue to break new ground with these innovative risk management structures,” commented Karsten Berlage, managing director, Allianz Alternative Risk Transfer (ART). “We are pleased to collaborate with the Nephila Climate and REsurety teams yet again for another ‘first,’ and to provide Scout with the revenue certainty they needed to launch construction of the project.”

These renewable energy hedging products help operators mitigate shape, price and volume risk, lowering 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 strategies.

These wind farm risk transfer transactions are an innovative mix of financing and reinsurance 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.