Wind farm operators find path to hedge against low winds

by Christopher Martin, Bloomberg

Wind farm operators can’t predict the weather. But they can hedge it.

Investment manager Nephila Holdings Ltd. and insurance giant Allianz SE have banded together to offer an insurance policy of sorts to wind farm developers known as a “proxy revenue swap.” It’s a technical way of saying they’re guaranteeing that revenue from a farm will fall within a certain range.

While such hedges against the volatility of solar and wind power aren’t exactly new, they’re gaining traction as more renewable energy resources come online and developers seek to insure revenue to attract better financing. In the latest swap, Ares Management Corp. signed contracts with Allianz to hedge the output and revenue from three wind farms being upgraded in Texas, marking the first time such an arrangement has been used for a so-called repowering wind project.

Nephila, a hedge fund that manages about $12 billion for investors, is taking on the risk of these contracts with the help of a forecasting startup called REsurety. The firm is essentially betting that REsurety has the historical wind, power market, weather and farm operating data it needs to come up accurate forecasts for the revenue of a plant. It’s using a global portfolio of renewable energy project protections to take on and spread around the risk.

Real Consequences

“We’re happy to take it — for the right price,” said Barney Schauble, a managing principal at Nephila.

The consequences of calm weather for wind project owners are real. Unusually mild weather in the upper Midwest and Great Plains in late 2018 took a bite out of fourth-quarter profits for NextEra Energy Inc. and Avangrid Inc. — both large wind farm operators — and may have affected other investors that have yet to report earnings.

REsurety estimated that it has helped back the returns for about 5,000 megawatts of wind and solar farms so far. “Our fundamental job is to minimize uncertainty,” said Lee Taylor, the company’s chief executive officer. “We saw how November was very bad for U.S. wind production.”

Financing power projects is big business and a big topic of discussion at POWERGEN International, set to hit New Orleans, November 19-21, 2019

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