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Wind energy indices as tool for risk management

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To guard wind farm operators against low revenues in years when the wind does not blow as hard as normal, energy trader Entergy-Koch Trading (EKT) is producing a series of monthly wind power indices for locations across Europe and the United States showing how much power output from wind plants is likely to have deviated from average. Operators can then hedge their risks by entering into risk management products.

EKT calculates its Wind Power Index (WPI) by taking wind speed data for each month and converting the wind speeds into theoretical output based on the generation curves of 50 of the most popular wind turbine models. The index shows wind power generation in each region as a monthly value where the annual sum of 100 is normal as compared with the long term average. EKT claims that tests against available generation data show the indices closely match actual generation. But it can provide an even closer correlation to a wind farm's output by tailoring, free of charge, an index to the exact location and technology of the wind farm. The indices are available monthly and are accompanied by a map of each month's deviation from normal.

A series of risk management products -- either insurance or weather derivatives -- has been created by EKT based on the indices which are tailored to the level of risk which companies are looking to transfer, and the price they are prepared to pay. The company claims that through its indices, wind farm developers can stabilise revenues in line with expectations and gain access to cheaper finance for their projects.

EKT has been involved in the weather derivatives market since 1997, says the company's David Pethick. It began looking at the wind industry around nine months ago. "We saw that for wind power generators there is weather risk and we saw a lot of swing in their revenues from year to year," he says. "We were looking to build an insurance-type product to hedge their wind risk so they could concentrate on other aspects of their business."

Pethick points out that the indices are of interest not only to developers, but also to financiers. In particular, where a financier's wind energy investments are clustered in a single country, it becomes very exposed to risk of periods of low wind speeds in that region, he says. EKT can more efficiently take on that wind risk by including it into its portfolio of risk from around Europe and the US, he explains. Depending on demand, EKT says it could also produce WPIs for Australia, India, China and Japan, and has already completed tailored WPI's in Australia.

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