Allianz Risk Transfer (Bermuda) (ART) and its partners have developed a risk management solution for hedging wind volume risks for wind farms.
ART has implemented a 10-year proxy revenue swap with Capital Power’s Bloom Wind Farm, to be constructed near Dodge City, Kansas.
The new risk management tool for the wind power industry was created and commercialised through a partnership amongst ART, Nephila Capital, REsurety, and Altenex.
Each partner contributed specialised expertise to create the innovative swap solution. ART and Nephila leveraged their collective weather risk transfer expertise, risk capacity, underwriting sophistication and credit strength. REsurety provided the specialised risk analyses relied upon for the structuring of the proxy revenue swap and will deliver ongoing services as the calculation agent for the transaction. Altenex supports the management of power price-linked risk as part of the Proxy Revenue Swap structure.
ART and Nephila have a long-standing partnership in the weather and catastrophe risk markets and have worked with REsurety since 2012 to develop risk transfer products for the wind power industry. More recently, through a partnership established between REsurety and Altenex in 2015, protection against low wind output has been expanded to include power price risk as well as generation volume-linked risk exposures.
The 10-year agreement will secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 178 MW Bloom Wind Farm.
Previously, traditional price-focused hedging solutions have been commonly used to try to address this, but this newly created proxy revenue swap offers an entirely new form of revenue risk management for the wind power industry, said ART.
Similar in concept to a tolling agreement or capacity payment, the structure swaps the floating revenues of a wind farm – those driven by the hourly wind resource and power prices – for a fixed annual payment. This transaction is the first in a robust pipeline of future wind financings and would also be feasible in other wind farm markets globally beyond the US, said the firm.
Karsten Berlage, managing director of ART, said: “This new product line for the wind power industry will enable more efficient and cost-effective financing of wind generation projects,” said Karsten Berlage, managing director of ART.
“Due to the high upfront cost of modern utility-scale wind projects, it is important for investors in such projects to be able to secure long term stable revenues to underpin the investment.
Berlage said the ART-led swap is unique in several aspects.
“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,” he said.
Berlage added: “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. The result is a level of revenue certainty never before available to the wind industry.”
Allianz Risk Transfer, Risk management, Wind farms, Nephila Capital, REsurety, Altenex, Karsten Berlage, Insurance, Bermuda, North America