By 2030 only 6% of Europe’s wind energy capacity will be unexposed to market risks through support schemes, down from 75% today.
This means that the transition to auctions allocating renewable energy support comes with more exposure to price risk. One new way to address uncertainty on project revenues is hedging against volume risk. This is according to ‘The value of hedging,’ a new report published today by WindEurope and Swiss Re Corporate Solutions.
Hedging is emerging as an instrument to cover the resource risk of variable wind generation, or ‘volume risk’. Auctions, feed-in-premiums and power purchase agreements take away some of the price risk. But they still leave asset owners exposed to a degree of volume risk due to the uncertainty in the total amount and timing of wind output. If there is less wind in a given year, hedging will help to reduce the variability of returns and improves cash flow predictability to asset owners.
Due to the seasonality of wind, project owners can expect 30-45% more wind during winter than summer. An average wind farm of 30 MW may need to hedge for +/-10% annual variations in its production forecast. By reducing the variability of the returns, cash flows move closer to the profile of a fixed-income investment, similar to a bond. The increased certainty improves the capital structure of projects by reducing their cost of capital.
Risk management services such as hedging could extract a value worth €2.5bn for new wind assets installed between 2017 and 2020. This may go up to €7.6bn for new wind power installations between 2017 and 2030.
Pierre Tardieu, WindEurope Chief Policy Officer said: “Installed wind capacity in Europe could double to 323 GW by 2030. With the growth of the wind energy sector and its increased exposure to price and volume risk there will be a need for a variety of revenue stabilisation mechanisms. Hedging instruments are emerging as a viable solution to mitigate some of these risks. They transfer the risk of the variability in generation from the project company to a counter-party willing to take on that risk. What they offer to wind farm owners is more certainty on their income. And that’s what can reduce a project’s costs of capital. That is significant now that debt represents 40% and 70% of the capital requirements for offshore and onshore projects respectively.”
Stuart Brown, European head of sales for weather hedging products at Swiss Re Corporate Solutions said: “Volume hedges for wind have been available for several years, but the take-up has been limited because they weren’t needed. But as merchant risk becomes more dominant, the value added by hedging production may come to be make-or-break for greenfield, re-structuring and PPA wind development. We’re pleased to see work being done to try to quantify that value added.”