GCube: Weather risk accounts for $56 billion in untapped wind-asset values worldwide

Failure to efficiently transfer weather risk has left wind-energy stakeholders across the globe with untapped asset values. The total: an estimated USD $56 billion. This estimate, produced by leading renewable energy underwriter, GCube Underwriting, emphasizes the long-term financial impact of wind-speed volatility on portfolio and project revenues and highlights the size of the market for Weather Risk Transfer (WRT) mechanisms in the sector.

GCube estimates that, for a 50-MW onshore wind farm worth $80 million, successfully mitigating or transferring weather risk could achieve a total net present value increase of $5.8 million.

In a new report, entitled Gone with the Wind: An Asset Manager’s Guide to Mitigating Wind Power Resource Risk, GCube outlines the scale of the threat posed by resource under-performance to wind energy operators and investors around the world.

Well-documented recent wind-speed lulls in established markets such as North America, Europe, and Australia – often triggered by unforeseen and widespread climatic phenomena – have affected the ability of operational assets to deliver the outputs that were forecast by resource analysts prior to their construction.

These deviations from expected performance not only impact financial results for project owners, independent power producers, and utilities, but have also resulted in damaging ratings downgrades. Furthermore, in high-capacity regions such as Texas, where the grid is highly dependent on wind energy, production shortfalls have created energy security concerns.

In turn, these issues demonstrate that resource under-performance has now surpassed mechanical breakdown and component damage as the major obstacle to achieving bankable wind energy projects.

GCube estimates that, for a 50-MW onshore wind farm worth $80 million, successfully mitigating or transferring weather risk could achieve a total net present value increase of $5.8 million. By comparison, the same 50-MW asset with comprehensive Operational All Risks insurance coverage in place is likely to see just $1.5 million on average of financial losses throughout its lifetime attributed to technical failure and associated downtime.

“As the wind energy sector has matured, a number of the main threats to profitability have increasingly been managed,” said Geoffrey Taunton-Collins, Weather Risk Analyst at GCube and co-author of Gone with the Wind. “The reliability of turbine and other technologies has rapidly improved, and the risk of malfunction or damage to them has been covered by more traditional insurance products.”

Following major recent advances in data measurement and analysis, the insurance market has responded to this bankability challenge with the development of products that offer long-term reallocation of weather risk, smoothing of project revenues, and the opportunity to unlock considerable untapped asset value.

These WRT mechanisms, explained simply, provide compensation in years of resource underperformance, mitigating the financial impact of long-term wind speed fluctuations. In turn, they create certainty in revenue forecasts, which confers a number of benefits for financing and refinancing, alongside the broader risk management, investor confidence and reputational advantages that derive from stable returns.

“Now the industry has realized that underperformance represents the single biggest remaining challenge that stakeholders face during the lifetime of a project,” said Taunton-Collins. “With the recent rise in refinancing, and significant M&A activity predicted for the first half of 2017, particularly in the United States, meeting the resource risk challenge has moved up the agenda as the sector wakes up to the substantial opportunities transferring weather risk effectively can provide for value creation.”

He added: “Coupled with important recent breakthroughs in the structuring of the product itself, this is creating serious momentum for the Weather Risk Transfer market.”

Gone with the Wind is the latest in a series of reports authored for GCube’s client base and the wider renewable energy market. Seeking to remove barriers to understanding of WRT mechanisms, it draws on GCube’s experience as the leading specialist insurance provider in the global renewable energy sector, alongside perspectives from Australian portfolio owner Infigen, weather measurement experts Vaisala and wind power risk transfer intermediary REsurety.

To request a copy of Gone with the Wind: An Asset Manager’s Guide to Mitigating Wind Power Resource Risk, please visit: here.

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