POWER January 2015 - 35

RENEWABLE POWER
Reducing Weather-Related Risks
in Renewable Generation
You can't control the weather, but you can control how you handle the ways it
affects your renewable plant. From financial hedging to accurate predictions,
the tools in a plant owner's arsenal are more capable than ever.
Thomas W. Overton, JD
T
he Black Oak Wind Farm project is an
11.9-MW wind facility under development
in Tompkins County, N.Y., a few
miles west of Ithaca. For the most part, Black
Oak is unremarkable-the communityowned
facility will consist of seven GE 1.7MW
turbines and will sell power under a 10year
power purchase agreement (Figure 1).
But Black Oak is a groundbreaker in one
very important respect: It is the first wind
project to use a long-term hedge mechanism
to protect its investors against future windrelated
risks to its income. Provided by asset
manager Nephila Capital, the wind hedge,
which settles off actual power production
rather than wind speed, allows Black Oak
to transfer the risk of lower-than-expected
wind volumes, thus giving the project improved
revenue certainty over the duration
of the hedge.
Marguerite Wells, Black Oak's project
manager, told POWER they decided to go
with a wind hedge because her group has so
few resources behind it. " We were interested
in finding the cheapest financing we can and
reducing the cost of capital. " With little background
in power generation, Wells was looking
to play it safe.
In discussing a possible power purchase
agreement between Black Oak and nearby
Cornell University, Wells was introduced to
Boston-based firm REsurety. She explained
that in her initial dealings with potential financing
companies, the costs of financing the
project threatened to end it. This was because
of the very conservative assumptions the financing
groups were making about the wind
farm's potential revenue.
The hedge, Wells explained, " makes sure
we can always pay our debts. " If revenue is
down because wind volumes are lower than
expected, the project will be protected. Even
better, she said, " [the hedge] even pays for
itself in a slightly lower cost of capital. Peoples'
investments are more secure, so they
can take a lower rate of return. "
Still, Wells confessed that it took her a few
weeks to " get her head around " the idea.
January 2015 | POWER
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35
Old Idea, New Applications
REsurety worked with Black Oak and Nephila
to structure the hedge. Lee Taylor,
REsurety's CEO, told POWER that while
the approach has considerable promise for
renewable generators-the firm currently
has hedging contracts under review or in the
structuring process for more than 300 MW
of capacity-it's still a new idea with some
unique characteristics.
Weather-related hedging mechanisms are
routine in other forms of generation but are
so far almost unheard of in renewables, despite
the obvious benefits hedging could provide.
In some respects, such mechanisms are
like other types of risk management: They
transfer risk from one party seeking to increase
the stability and predictability of its
investments to another party looking to aggregate
and diversify exposures, collecting a
premium in exchange for their risk-taking capacity.
But there are also some important differences,
Taylor said. " The risk-takers in this
market operate more like insurance firms-
and in some cases are insurance firms-that
have a fundamentally different outlook than
a trader. "
The main distinction with renewables,
especially wind, is that the risks are tied to
much-less-easily correlated indexes than
heating- or cooling-degree days and fuel
prices. " The basis risk uncertainty in wind
hedging has kept a lot of potential buyers
out of the market, " explained Taylor. Because
wind speed and solar insolation are so
localized, it is difficult to accurately predict
power output across an entire wind or solar
farm from a single meteorological station.
Also, wind power generation is not perfectly
correlated with instantaneous wind speed because
other weather-driven factors like shear,
temperature, direction, and turbulence can all
influence power output. That means that new
and sophisticated analytics and data are necessary
to structure and settle a wind hedge.
REsurety, for example, employs its analytics
in order to structure weather hedging contracts
that settle off of actual power produc1.
Hedged. The Black Oak Wind Farm project in western New York, shown in this photo
mock-up, is using a financial hedge to protect its investors against lower-than-expected output.
Courtesy: Black Oak Wind Farm

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POWER January 2015

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