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Hedging Starting to Emerge as the Solution to Combat the Risk Associated with Wind Energy


Hedging looks set to play an important part in wind energy; this is according to reports from Swiss Re and WindEurope.
 
Future projections reveal that by 2030 the capacity at which Europe’s wind energy would be unprotected from risks due to market forces would be at 6 percent which is a 69% drop from the current figure of 75% today. This implies that the move to auction renewable energy support is accompanied by more price risk.
 
The report from Swiss Re and WindEurope on the Value of Hedging reveal that the way to handle the apprehension on unpredictable project revenues would be to hedge it against volume risk. Hedging is looking like the tool needed to handle the risk associated with varying wind generation capacity. Power purchase agreement (PPA), feed-in-premiums, and auctions have been able to limit the risk associated with pricing. Notwithstanding, investors and owners of wind assets are still left exposed to a certain amount of volume risk as a result of the unpredictable nature of wind produced and its timing. The loss to be accrued by asset owners due to less wind in a particular year would be covered by hedging your returns, and this helps to improve cash flow predictability.
 
Considering the fact that wind is a seasonal occurrence, asset owners could expect less wind during summer than in the winter. On the average, a wind farm that produces about 30MW of energy would be required to hedge about +/-10% yearly difference in its production estimates. Being able to reduce the uncertainty in returns, allows cash flow to approach something similar to a steady-income investment. This helps improve the structure of the project by decreasing the capital cost.
 
Being able to manage risk by using services like hedging could create a value of about €2.5Bn for newly installed wind assets from now to 2020. This figure may rise to as much as €7.6Bn for new installations from 2017 to 2030.
 
The projected rise of wind energy capacity to 323 GW by 2030 calls for the need for multiple revenue stabilization techniques to help cushion the effect of price and volume risk. This is according to Pierre Tardieu, chief policy officer for WindEurope.
 
Stuart Brown, on the other hand, is of the opinion that although the option to hedge wind volume risk has been available for a while, the option wasn’t considered as it wasn’t needed at the time. Now, with an increase in merchant risk, it has become more important to consider hedging wind production capacities. He also expresses satisfaction that work is being done to be able to quantify the value that hedging brings to the table.