US firm REsurety tackles vexing weather-driven wind risks

Wind is an abundant “fuel” and free but as an intermittent energy resource it contains expensive weather-driven risks that corporate America doesn’t always understand and struggles to manage with the industry moving beyond the utility PPA model.

These risks and the potential costs can discourage both new buyers from entering the renewables market, and existing ones and some energy retailers from expanding their presence – contrary to wishes of their own customers and shareholders, politicians and public opinion in most states.

US corporate and industrial (C&I) power purchases in 2018 totaled 8.6GW – 4.3GW each for wind and solar, according to Bloomberg New Energy Finance. But many of them are being made by repeat buyers – a dozen or so upper echelon Fortune 500 companies.

Enter REsurety, a Boston-based risk management and information services company whose focus is the variability of wind and solar energy. Thus far, non-utility buyers – now half the US wind power market – and their suppliers have used its innovative products for more than 5GW of deals to mitigate weather-related and other risks.

The financial impact of those weather-related risks can be an “unpleasant surprise” for corporate buyers holding traditional PPAs, Lee Taylor, chief executive and co-founder of REsurety, said in an interview.

While PPAs do offer some protection against price increases for delivered energy over their tenor, they don’t help with uncertainty and volatility created by near-term generation intermittency risk.

At issue is that the wind resource, by nature, can vary 20% or more year-on-year for any given project and by 100% in any given hour, says Taylor. These day-to-day, hour-by-hour oscillations cause the level of electricity production to fluctuate and this impacts market prices. Above-average supply can depress prices and the reverse is true when output is low.

In Texas, for example, the nation’s top wind market, power prices can dramatically spike during summer months when electricity demand is high, particularly in the afternoons when many turbines are idle or barely spinning due to little air movement in the state’s interior.

Because volume and price move inversely, the variability and financial impacts are challenging for even the largest sophisticated renewable energy buyers such as Google.

Depending on the time of year, having to procure replacement energy on short notice when wind stops blowing or under-produces can quickly become more expensive than PPA prices (or save money if power prices are low).

Moreover, few non-utility buyers have the expertise or desire to assume the complicated and time-consuming burden of managing and settling variations in wind energy prices, resolving supply dislocations or dealing with risks they pose to their operations.

Finding one answer

Last October, REsurety, working with Microsoft, Nephila Climate, an investment manager focused on insurance and reinsurance markets, and the Allianz Risk Transfer (ART), a unit of insurance giant Allianz Global Corporate & Specialty, developed a creative solution called a Volume Firming Agreement.

The VFA effectively transfers the risks tied to how future weather conditions will impact a PPA’s financial value to third party insurance companies whose core business focus is taking weather-related risks. Microsoft became the first adopter to use VFAs to supplement PPAs covering three operating wind farms in Illinois, Kansas and Texas.

Nephila and ART provided Microsoft with a stable, albeit somewhat higher price to replace the fluctuating one. Equally important, they also guaranteed wind energy delivery on an hourly basis throughout the day.

With a VFA, a C&I buyer can “firm” their contract to a specific fixed volume of energy. “Which, in combination with the underlying PPA, gives the buyer a perfect hedge on a known volume of energy,” says Taylor.

The insurers can do this, in part, because they benefit from REsurety’s analysis of intermittency risk gleaned from proprietary data bases built this decade that track and dissect financial and operating performance of the nation’s wind farms down to the turbine level.

In addition, insurers’ ability to diversify weather-driven risks in a way that none of their customers can replicate enables them to effectively hold a basket of exposures.

The insurers make money by charging Microsoft a premium either in cash or in the expected value of future settlements. That price for risk management is combined with the price of the underlying PPA to yield the total cost. Still, the total price comes in under the cost of power from fossil plants, according to Taylor.

Changing US market

For both buyers and sellers of wind energy, the US market is rapidly moving from the traditional 20-year PPAs between independent power producers and electric utilities that drove steady industry growth over the last two decades. As of 30 June, there was about 98GW of installed power capacity nationwide versus 2.5GW in 2000.

Those PPAs required physical delivery of energy, were relatively straightforward and generally left project owners and ratepayers shouldering the risks – and costs. Sellers could rely on a steady revenue stream.

Taylor notes that utility purchases of renewable power were heavily driven by state mandates. As those were satisfied (some have been increased), this led to a “demand void” in long-term procurement that corporates began to increasingly fill starting in 2014.

“The new entrants are more sensitive to volatility and risk,” he says, noting they now include commodity traders and insurers. “As a result, the industry as a whole is undergoing a major evolution.”

C&Is are turning to new contract “structures” in order to better allocate risks to the party best equipped to hold and manage them. REsurety, for example, offers a contract settlement service that relieves the buyer from taking on financial exposure to how a wind project is built and operated – in the event the project or its operations differ from what the developer offered when the PPA was signed.

Another product called the Settlement Guarantee Agreement gives corporate buyers with PPAs the ability to lock-in the value of future PPA settlements in the event the buyer no longer has load in the market where they signed their PPA.

Sellers, too, are affected by the market changes. Different types of hedges allow developers to finance wind projects, but they are shorter in duration – 10 to 12 years – and they don’t provide the same level of revenue certainty as a utility PPA.

REsurety has led industry development of a new hedge up to 10 years called a Proxy Revenue Swap whose p roviders are weather-risk investors such as reinsurers. They pay the project a pre-agreed fixed price for a period of settlement that is either a quarter or yearly, not per MWh produced or sold.

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