Return to search

Weather risks wiping $56bn off wind assets, says GCube

With many projects failing to meet output forecasts, underperformance has become the industry’s ‘biggest challenge’, according to the insurance provider.

Wind projects lose a combined $56 billion in value around the world due to production shortfall caused by uninsured weather risks, according to GCube Insurance Services.

GCube, which offers a wind insurance package, said this week in a report that owners of wind projects around the world are taking a hit on the value of their assets by playing chance with the weather.

The report looks specifically at recent wind lulls in North America, citing falling energy production in Texas in 2008, a 6 percent decrease in US wind farms in September 2015 despite a 9 percent more capacity and regions in Mexico reporting wind speeds up to 20 percent below average in February 2016 compared to the previous year.

“In the wind energy sector, in particular, underperformance now represents the biggest challenge that stakeholders face during the lifetime of a project,” wrote the report’s authors, head of business development Jatin Sharma and weather risk analyst Geoffrey Taunton-Collins.

“Many wind projects are failing to generate wind energy outputs that were forecast by resource analysts prior to their construction.”

Wind facilities that use insurance mechanisms, like GCube’s Weather Risk Transfer, can increase the value of their investment, the author’s argued. For example, they said a 50MW onshore wind farm that cost $80 million to construct could post a $5.8 million value increase by transferring weather risk. They noted a project’s value increase depends on the local wind, electricity and tax regime, potential reduction in the cost of equity and more favourable debt arrangements.

The Weather Risk Transfer works by hedging 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.

As more wind projects are built, the market for weather risk mechanisms stands to benefit, the report said. Allianz Risk Transfer, a subsidiary of Germany’s Allianz, offers a “revenue proxy swap” that works similarly to GCube’s Weather Risk Transfer.