Richard Oduntan, PhD Matt Coleman Barney Schauble

Abstract

Volatility of wind speed at different time scales constitute financial risk for wind energy projects and associated stakeholders such as developers, lenders, off-takers and investors. In addition, the presence of large capacity of intermittent wind generation in the energy supply mix also poses price risk for participants in competitive power markets. For instance, operators of baseload generation assets such as nuclear and large hydro may be faced with forced output curtailment during periods of unexpectedly high wind speed, resulting in financial losses.

Customized weather derivative solutions are available for transferring financial risk arising from wind energy generation. However, there are no standardized, market products that can allow power market participants to transfer or trade risks arising from overall power market wind energy volatility. To this end, in this paper we discuss the development of a wind energy index and associated, standardized weather derivative products for the ERCOT power market. We conclude the paper by showing the potential application of the index and associated derivative products focusing on case studies that are relevant for the ERCOT power market.