Assessing the Economic Value of Wind Derivatives for Wind Project Finance

Weather derivatives and insurance products are tools utilized by a variety of businesses and municipalities to hedge volumetric risk and smooth earnings in industries such as traditional and renewable energy, agriculture, retail, and entertainment. In the wind energy space, an increasing number of market participants—from developers to project finance lenders—desire to hedge volumetric risks due to fluctuations in wind speed. However, there is a lack of in-depth understanding of the economic benefit of such hedges which makes it difficult to assess whether or not the price of a hedge is attractive.

To address this issue, we devised a joint research project(*) to determine the economic value of a wind hedge. Findings indicate that a weather risk transfer product creates value for a wind development project regardless of site windiness, hedge structure, or coverage tenor. Value is derived from the improved opportunity to employ leverage and potential for better financing terms given the reduction in volumetric risk.

(*)Project collaborators: Tuck School of Business at Dartmouth, Google Energy, Horizon Wind Energy, and 3Tier