Allianz Risk Transfer (ART) and a group of partner companies have developed a financing solution for a wind farm in Kansas that insures against one of the wind industry’s biggest problems, intermittent production.
The high upfront costs of wind farms means there is added risk when a project does not generate the power the owner is expecting if the wind is blowing too much or too little. This creates a liability for repaying interest and principal. ART, using a proxy revenue swap that operates like a tolling agreement or capacity payment, swaps the floating revenues of a wind farm for a fixed annual payment.
The product is debuting with Capital Power’s 178MW Bloom Wind Farm, under construction in Kansas, giving the developer a 10-year insurance against wind volatility.
“We’re protecting companies and their income statements against their loss of revenue or excessive costs due to adverse weather conditions,” Karsten Berlage, managing director at Allianz, told sister publication Low Carbon Energy Investor.
“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,” explained Berlage.
“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”, Berlage continues. “The result is a level of revenue certainty never before available to the wind industry.”
This will allow developers to gain access to better financing, higher leverage and better interest rates from their capital providers, according to Berlage. The risk management insurance company has worked for the last three years with Nephila, an investment manager specialising in weather risk, energy production analysis firm REsurety and energy management network Altenex to develop the financing, and Berlage says it’s something that is replicable across most wind farms in the US and abroad.
“It makes so much economic sense that I’m surprised we haven’t done it already,” Berlage said. “Hopefully everyone understands the attractiveness of this fairly quickly when you understand the weighted average cost of capital and that the project enhancements get much improved.”