Insuring against intermittency

In a wind investor’s perfect world, a turbine’s blades are always spinning. There is no need for costly weather surveys because strong winds are constant. A lull in production? That’s for the solar industry to worry about. There’s no such things as weather risk in a wind investor’s perfect world.

But the world is not perfect, and the wind is not blowing constantly. According to weather analysts, that is especially true in the US, where factors including El Niño and a changing climate explain why traditionally reliable wind speeds have fallen across the country.

“The trend for the last decade or two has been for more extreme weather events to occur, particularly on the wind front,” says Geoff Taunton-Collins, a weather risk analyst at GCube Insurance Services. “This is obviously hitting a lot of wind farms and actually it’s something we’ve been seeing continuing in 2016.”

Jatin Sharma, GCube’s head of business development, adds: “Suddenly, you’re in the second or third year of operation and you have two bad years. Relatively small, independent power producers that are project financed and debt leveraged, find themselves with investors that are scrambling.”

Utilities and larger portfolio managers are also at risk, Sharma argues. Anyone who has a significant stake in wind assets, particularly with high leverage, is vulnerable to cashflow shocks from low production.

To mitigate this risk, investors are turning to a risk transfer product offered by insurance companies like GCube that hedges against wind intermittency. A wind farm owner, such as an investor or developer, pays a premium to insure a certain percentage of production. If production drops, the policyholder gets a payout. “The question is what your tolerance for that intermittency is,” Sharma says. “I like to phrase it in terms of an opportunity cost rather than a risk.”

For Capital Power, purchasing a risk transfer was the right call. Matt Martins, manager for business development at the Canadian utility company, points out Capital Power decided to purchase a “proxy revenue swap” from Allianz Risk Transfer before its 178MW Bloom Wind project in western Kansas was operational. 

Martins says the risk transfer relieves pressure from a power purchase agreement (PPA) for a wind asset to produce a certain amount of energy per day: “We don’t have a minimum production threshold and […] we don’t have to produce power during certain times of the day. Often times it’s windiest at night, and a lot of PPAs want their power in the middle of the day. This eliminates the nuance of that traditional PPA.”

Before committing any capital, wind investors typically spend years gathering weather data about a project site. “What Allianz does,” Martins explains,” is they take that long history and they are able to get comfortable with the wind regime and essentially provide an insurance product around it. Allianz, from our perspective, is the offtake. They will ultimately re-market that power.”

Martins, too, notes the “overarching underperformance” of US wind projects recently. That could be an alarming statement from an investor that just put $270 million towards its seventh such asset, but he seemed nonchalant thanks to the risk transfer. “The weather risk has essentially been mitigated,” he argues. “The price that we were able to obtain from Allianz was consistent with, or even slightly above the traditional utility PPAs.”

With factors as unpredictable as the weather, forecasting an investment will never be perfect. Most investors accept this risk upfront. But for institutions, which demand consistent returns, this can be too concerning. Risk transfer policies, however, are now becoming available to help smooth the flow of capital into the growing industry.

“Most people go into the wind space knowing that there are load factors that determine what yield you’ll get from your wind investment,” Sharma states. “What we try to do is say: ‘OK, there are a few solutions to dealing with that lack of wind.”