By 2030 only 6% of Europe’s wind energy capacity will be unexposed to market risks through support schemes, down from 75% today. This means that the transition to auctions allocating renewable energy support comes with more exposure to price risk. One new way to address uncertainty on project revenues is hedging against volume risk. This is according to ‘The value of hedging,’ a new report published by WindEurope and Swiss Re Corporate Solutions.
Hedging is emerging as an instrument to cover the resource risk of variable wind generation, or ‘volume risk’. Auctions, feed-in-premiums and power purchase agreements take away some of the price risk. But they still leave asset owners exposed to a degree of volume risk due to the uncertainty in the total amount and timing of wind output. If there is less wind in a given year, hedging will help to reduce the variability of returns and improves cash flow predictability to asset owners.
Due to the seasonality of wind, project owners can expect 30-45% more wind during winter than summer. An average wind farm of 30 MW may need to hedge for +/-10% annual variations in its production forecast. By reducing the variability of the returns, cash flows move closer to the profile of a fixed-income investment, similar to a bond. The increased certainty improves the capital structure of projects by reducing their cost of capital.
Risk management services such as hedging could extract a value worth €2.5bn for new wind assets installed between 2017 and 2020. This may go up to €7.6bn for new wind power installations between 2017 and 2030.