23 March 2016

Weather Risk Management 2016: Swiss Re Corporate Solutions and Infigen Energy wind hedge

Swiss Re Corporate Solutions has repeated its success in the Weather Risk Management category – this time for a wind hedge in Australia.

Working with Sydney-based Infigen Energy, the largest owner of wind energy capacity in Australia, the reinsurer's Corporate Solutions team developed a product that hedges Infigen's entire 557MW Australian portfolio of six wind farms, against weak wind conditions. 

It is the first hedge of its kind, claims Jamie Summons, originator, weather and energy team for Asia Pacific at Swiss Re Corporate Solutions, as it is based on actual energy production across multiple sites, in South Australia, New South Wales and Western Australia. Traditional wind hedges are tied to single-sites and are based on modelled wind speed indexes.

Basing the hedge on the quantity of energy actually produced removes much of the 'basis risk' associated with wind speed data, as wind conditions can vary significantly across a wind farm and the turbines are generally positioned above the height at which wind speed is measured.

The deal is based on a 'put' option that Infigen bought from Swiss Re that would pay the company a fixed sum for each megawatt-hour of power not generated below a trigger level based on the longterm average power output from the relevant sites.

However, such 'at-the-money' options tend to be expensive, Summons notes, so to help offset the cost, Infigen simultaneously sold Swiss Re a 'call' option that would see the company pay the reinsurer in the event of exceptionally good wind conditions. The net result should be more predictable cashflows and lower earnings volatility for Infigen.

"We had been looking to devise a structure that would provide increased revenue certainty and allow us to better manage the variability associated with wind resource across our geographicallydiverse Australian portfolio," says Miles George, Infigen's managing director. "We are pleased to have collaborated with Swiss Re Corporate Solutions on a unique structure that works for both parties."

Cashflow predictability is particularly important to Infigen as it remains heavily indebted, despite selling off its US wind and solar assets last year.

The hedge runs from 1 April 2015 to 31 March 2016, and the payout, if there is one, will be determined by aggregate energy production from the six sites over that period.

Wind conditions since the deal began have been "in-line with our forecasts, i.e. not generating what would be considered 'a good year," says Richard Farrell, Infigen's group manager of investor relations and strategy. This means the hedge is currently running in Infigen's favour, adds Summons at Swiss Re.

In the generator's annual report for the year ended 30 June, chairman Mike Hutchinson said a 7% decline in output, compared with the previous year, was largely due to unfavourable wind conditions. Coupled with lower electricity prices, this resulted in an 8% decline in revenues to A$133.8 million ($99.7 million).

The new hedge is one of several measures the company is taking to de-risk its business, as it emerges from a period of regulatory uncertainty in the Australian energy market and prepares to help the nation achieve its goal of almost doubling large-scale renewable energy capacity in the next five years.

Infigen currently has a 1.2GW pipeline of projects approved for development, representing about 20% of the country's publicly proposed 6GW of wind and solar projects.

The transaction is the first time the company has used an insurance product to hedge its wind exposure and stemmed from an idea developed in-house.

Coming just a year after Swiss Re claimed the 2014 weather risk management Deal of the Year for a solar hedge for photovoltaic power plants in China, this year's novel transaction underlines the enormous potential for weather risk hedges as the renewable power sector continues its rapid global advance.

"It's never been done before anywhere," says Summons. It took some time to design, he acknowledges, but "renewables are going to be such a big deal, it was important to get it right."

PERSONALITY OF THE YEAR Mark Carney, Bank of England and FSB
BIOENERGY Enviva Partners
SOLAR Shams Ma'an
WIND Veja Mate
M&A Nordex and Acciona Wind Power
ENVIRONMENTAL BOND Lightsource Renewables
IPO 8point3 Energy Partners
ENERGY EFFICIENCY Renew Financial and Citi
WEATHER RISK Swiss Re Corporate Solutions 
CARBON World Bank's Pilot Auction Facility