and partners have developed an innovative risk management solution for hedging wind volume risks for wind farms. ART has executed a 10-year Proxy Revenue Swap with Capital Power’s Bloom Wind Farm, to be constructed near Dodge City, Kansas.
This new risk management tool for the wind power industry was created and commercialized through a partnership amongst ART, Nephila Capital Limited (Nephila), REsurety, Inc (REsurety) and Altenex, LLC (Altenex). The 10-year agreement will secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 178 MW Bloom Wind Farm.
“This new product line for the wind power industry will enable more efficient and cost-effective financing of wind generation projects,” said Karsten Berlage, Managing Director of ART. Due to the high upfront cost of modern utility-scale wind projects, it is important for investors in such projects to be able to secure long term stable revenues to underpin the investment.
Previously, traditional price-focused hedging solutions have been commonly used to try to address this, but this newly created Proxy Revenue Swap offers an entirely new form of revenue risk management for the wind power industry. Similar in concept to a tolling agreement or capacity payment, this novel structure swaps the floating revenues of a wind farm – those driven by the hourly wind resource and power prices – for a fixed annual payment. This transaction is the first in a robust pipeline of future wind financings and would also be feasible in other wind farm markets globally beyond the US.
The ART-led swap is unique in several aspects. “Recent advances in data availability for the US wind market as well as in risk assessment and modeling allowed this unprecedented scope of risk transfer within a single product, which is available for up to 10 years,” explained Berlage. “In contrast to more short-term and price-focused hedging approaches, for the first time price and wind volume risks of a wind farm have been managed at the tenor needed to support a project's capital structure and balance sheet”, Berlage continues. “The result is a level of revenue certainty never before available to the wind industry.”
Each partner contributed highly specialized expertise to create this innovative swap solution. ART and Nephila leveraged their collective weather risk transfer expertise, risk capacity, underwriting sophistication and credit strength. REsurety has provided the specialized risk analyses relied upon for the structuring of the Proxy Revenue Swap and delivers ongoing services as the calculation agent for the transaction. Altenex supports the management of power price-linked risk as part of the Proxy Revenue Swap structure.
ART and Nephila have a long-standing partnership in the weather and catastrophe risk markets and have worked with REsurety since 2012 to develop risk transfer products for the wind power industry. More recently, through a partnership established between REsurety and Altenex in 2015, protection against low wind output has been expanded to include power price risk as well as generation volume-linked risk exposures.