Earlier this month, REsurety helped Enel Green Power execute a derivatives-based contract to receive payments for output from a portion of its 450MW High Lonesome wind farm in Texas.
In aiding the negotiations with insurer Allianz and fellow risk management company Nephila Climate, REsurety surpassed 5GW of renewable energy risk mitigation contracts.
There are several variations of the power off-take agreements that the Boston-based company helps broker.
But common to all of them is a calculation of the expected value of future energy production at a project, adjustments paid depending on actual performance, and the transfer of risk to a third party more capable of handling it.
"Underneath all of these products is someone buying or selling the electricity and they want do that on a known basis," the company’s CEO Lee Taylor told Windpower Monthly.
Increasingly, commercial and industrial (C&I) companies and commodity traders are becoming interested in buying renewable energy directly, and are becoming REsurety’s clients, Taylor added.
Such companies are typically more anxious about cost than the utilities, that have traditionally signed power purchase agreements (PPAs), and are less capable of managing the uncertainty of power supply from variable energy sources.
Therefore, they are keen to offset this risk, Taylor explained.
"We have highly sensitive new parties coming in and taking the risk, which makes it difficult to attract financing," he added.
"They recognise that they are holding a lot of risk and so more aggressively and intelligently act to mitigate it."
Improved data-driven pricing and more accurate mechanisms for settling transactions are also enabling this shift to risk mitigation strategies, Taylor added.
He described the improvements in prediction and measuring as "going from a sledgehammer to a scalpel".
These two trends of new buyers of renewable energy and more accurate tools for predicting and measuring production are expected to continue.
Future growth factors
In the future, however, other factors will make weather-risk mitigation a more attractive proposition for buyers and sellers of renewable energy, Taylor believed.
As illustrated in a 2017 report by WindEurope and insurance firm Swiss Re, the move away from feed-in premiums for power generators is making operators increasingly exposed to weather and price risks.
This increased risk to project revenue, should wind speeds fall in a given year, means institutional investors are wary of taking on unprotected wind sites.
Taylor explained that support schemes for renewable power generation have meant debt has largely been crowded out of capital structures due to the increasing role of tax equity.
However, in a post-PTC US market, for example, risk-averse debt is likely to re-enter the capital structure of wind projects in a meaningful way, he said.
Taylor added that two other future challenges, both of which are linked to climate change, will likely make risk mitigation more commonplace.
"With climate change, the volatility of weather patterns is increasing," Taylor explained, adding that unfavourable conditions can cause prices to spike.
Meanwhile, attempts to limit climate change with more renewable energy sources on the grid and the decommissioning of fossil fuel plants will increase variability.
"It used to be you always had a thermal energy system to fall back on," Taylor explained. "But as more of the grid is composed of renewable energy, you have a weather-driven supply."
This, too, will create more uncertainty that buyers will look to mitigate.
Economies of scale
To date, REsurety’s customers have included Microsoft, Enel Green Power North America, Engie, Ørsted, Macquarie, and several other large international companies.
A challenge, Taylor admitted, will be adapting risk mitigation strategies for smaller buyers.
For now though, transactional costs — such as using independent assessments of a project, and fees paid to lawyers for negotiating the deal — make such tools less economically viable for smaller projects or smaller contracts.
"For a large project that cost will be insignificant," Taylor said. "But for a small project it won't be worth it."
However, reaching out to smaller buyers is a challenge that can be overcome as risk mitigation deals become more common.
"Contracts will be negotiated for less and less (cost) every time as there is more precedent, and engineers know more about how to do due diligence for projects," Taylor explained.
"It will become more economically viable as the transaction costs come down due to standardisation and efficiency."
Markets
Adapting risk mitigation tools for unregulated, less centralised markets is also a challenge — though versions of these strategies do exist for such markets, Taylor added.
"Buyers and sellers of intermittent generation are financially exposed to hourly variability of generation," he added.
"This is amplified by the hourly volatility of power prices. Buyers of these tools want to limit that financial exposure and increase confidence in future revenues for project operators, and costs for C&I buyers."
These strategies are more conducive to projects in markets with liquidly tradable energy prices, such as ERCOT in Texas, and PJM on the US’ east coast.
"This is because with greater visibility of pricing, there is a clearer path to track the price risk and how hourly price volatility corresponds to the hourly intermittency of the fuel source," Taylor explained.
Conversely, "with no regulated commodity market, it is harder," he added.
Physical solutions
While risk mitigation tools offset risk from variable energy sources, physical solutions to handle volatility are likely to improve, Taylor believes.
"Storage is still very expensive at a large scale, but as it becomes cheaper, and as thermal peaking plants get better at ramping up quickly, there will be physical solutions to mitigating risk," Taylor said.
These physical solutions could work in tandem with financial solutions to mitigate risk, he suggested.
In theory, as volatility increases, peaking plants become more valuable, while as peaking plants improve, volatility decreases.
"There will be a balance," he explained. "There will be an upper limit to volatility."
In practice, Taylor suggested, "if an insurer has signed 15 contracts in ERCOT North, and is worried about a weather event in Texas, they might look to invest in energy storage projects that create a physical hedge on the financial risk."
"Physical and financial tools could be partners, rather than competitors," he added.
Risk mitigation tools could, therefore, provide certainty for both risk-averse buyers and project operators anxious about future revenue, and could soon help small buyers of wind power.
Cutting costs
Another potential upside, Taylor suggested, is helping to reduce the levelised cost (LCOE) of renewable energy.
"Over the past few years, wind and solar have made enormous steps in driving down the ‘hard costs’ of energy (costs involved in the manufacturing and construction of a project, for example)," he acknowledged.
However, by transferring risk to a party better equipped to diversify it, such strategies could create a net benefit to the industry by addressing the ‘soft costs’ in a project — "most significantly, the cost of capital", Taylor added.
"This could contribute to a lower the levelised cost of energy."
