Hedging wind risk: new study shows big benefits to the wind industry
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Europe's wind energy sector has grown rapidly in recent years, and electricity from wind power has become competitive with fossil fuels. But as governments scale back their support to wind projects, the industry will have to take on a much greater share of the financial risk associated with wind volatility, known as weather volume risk.
According to a new study sponsored by Swiss Re Corporate Solutions, support schemes will protect only 6% of Europe's wind energy capacity against market risks by 2030, compared to 75% today. This means that, in the future, wind power producers could face significant income losses and reduced cash flows when the wind doesn't blow as expected.
Wind hedges offer an innovative way around this dilemma. Either in the form of a derivate or insurance cover, a hedge reduces the uncertainty of variable wind generation by transferring the risk of underproduction from the producer to a hedge provider. In the event of a shortfall, the hedge provider compensates the producer for any losses if the wind falls below a certain threshold.
Based on analysis provided by Swiss Re Corporate Solutions, the new report quantifies the potential gains that energy companies could derive from the use of wind hedges by increasing their debt capacity to finance wind power projects. It estimates that risk management services such as hedging could extract a value worth EUR 2.5 billion for new wind assets installed between 2017 and 2020. This could go up to EUR 7.6 billion for new wind power installations between 2017 and 2030.
Stuart Brown, Head Origination Weather & Energy APEMEA, says, "Volume hedges for wind have been available for several years, but the take-up has been limited because they weren't needed. But as merchant risk becomes more dominant, the value added by hedging production may come to be make-or-break for greenfield, re-structuring and PPA wind development. We're pleased to see work being done to try to quantify that value added."