Infigen, Swiss Re design “risk hedge” to compensate when wind doesn’t blow

Listed renewable energy company Infigen Energy has co-developed a new wind risk management facility that will better protect it against wind resource variability across its Australian wind farms.

The new wind risk hedge, purpose-built for Infigen by Swiss Re Corporate Solutions, will index the risk to actual energy production across the company’s entire portfolio of wind farms in South Australia, NSW and WA – an excess of 500MW of capacity – and pay Infigen a fixed amount per megawatt-hour for power not generated due to low wind.

By basing the hedge on the output from multiple sites – as opposed to traditional wind protection solutions, which are tied to single-site modeled wind speed indices – the risk from variability is reduced, thereby increasing cash flow predictability and avoiding earnings volatility.

According Jamie Summons, Swiss Re Corporate Solutions’ head of weather solutions for Asia Pacific, the wind farm industry – like other weather affected industries, such as retail, tourism and agriculture – are always looking for ways to better protect themselves in low-wind weather cycles.

And Infigen is no exception. As we reported earlier this year, the company had a rough year in 2014, suffering a 23 per cent fall in revenues from its Australian wind farms because of lower wind speeds, and a fall in wholesale energy market prices.

The lower wind speeds, and a fall in wholesale market prices, meant that revenue from its Australian operations fell 23 per cent to $65.6 million for the half. A 9 per cent lift in US revenue, partly due to the falling $A, reduced overall revenue falls at 6 per cent.

“By indexing the risk to actual energy production, Swiss Re Corporate Solutions has enabled Infigen Energy to directly transfer part of the risk of variable wind resource outcomes,” Summons said.

Swiss Re sees risk management services for the renewables sector as a growth industry, with a 50 per cent increase in renewable energy investment likely to more than double insurance and other risk transfer solutions spending in six of the world’s leading markets.

Depending on the scenario, annual expenditures on risk management services could reach between $US1.5 billion and $2.8 billion by 2020, a recent report from the insurer has predicted.

But can it insure against regulatory uncertainty, we wonder?