Weather Risk Transfer:

Hedging Strategies for Hydroelectric and Wind Energy Investors Renewable Energy Insurance

The problem
As the proportion of renewable generation in the global energy mix continues to grow, so too does the financial risk posed by the inherent volatility of the
resources that make it possible. This risk affects not only renewable energy producers, but also an ever-increasing number of players throughout the value
chain from developers, installers and independent power producers to utilities, pension funds and national governments.

The financial performance of any business is tied directly to the availability of its goods and services. Success is also governed by external factors such as
variable currency exchange rates, interest rates and commodity prices.

For businesses and entities working in the renewable energy sector, the single greatest and most significant factor influencing availability and performance is
weather. Wind and hydroelectric generators, in particular, face a persistent challenge as they look to manage the intermittency of wind and water resources.

Year in and year out, these firms must come to terms with variable weather conditions that cause volatility in generation output and, as a result, impact
revenues. In recent years, the German wind market has recorded significant annual variations in wind volume both below and above long-term averages:

20%

15%

10%

5%
Anomaly (%)

0%

-5%

-10%

-15%

-20% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Variance from 30-year average annual wind resource in Germany by percentage. Positive and negative percentages illustrate increase and decrease in wind resource from the average (0%), respectively. Based
on a representative sample over a 10-year period. Source: www.uwig.org/iea_report_on_variability.pdf and De-risking Wind Energy Projects: Expectations, Reality & Solutions authored by Nephila Capital Ltd.

Likewise, long-term drought conditions in established hydroelectric markets such as Brazil have contributed to nationwide generation shortfalls.1 In both
cases, resulting cash flow fluctuations have contributed to unstable enterprise value and affected the perception of credit risk amongst capital providers.

1
http://www.lloyds.com/~/media/lloyds/reports/360/360%20climate%20reports/fbdsreportonbrazilclimatechangeenglish.pdf

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Stabilising cash flows
Increasingly, this uncertainty has led wind and hydroelectric energy generators to seek an alternative profitability smoothing method by transferring weather
risk to a counterparty via a financial hedge.

Pays Premium
Hedge Buyer Hedge Seller
(Transfers Weather Risk) (Accepts Weather Risk)
Insures Risk

For companies that depend on weather for their production, hedges offer vital protection against cash flow fluctuations by means of compensation in the
eventuality of below or above par resource availability.

Indeed, conversations with market participants confirm that many project stakeholders are keen to stabilise future cash flows and are therefore willing to
accept a slightly lower upside by paying an insurance premium to minimise the impact of adverse weather on revenue.

In response to this market demand, GCube Underwriting Ltd. and GCube Insurance Services Inc. (GCube) are pleased to offer a weather hedge mechanism
for the wind and hydroelectric energy markets, enabling buyers to guarantee a floor on financial performance and thereby unlock additional value for
projects and their stakeholders.

Guarantee a floor on financial performance by hedging adverse weather

( + ) good weather results

Annual/Seasonal Financial Result

( - ) adverse weather results

1980 1985 1990 1995 2000 2005 2010

Year

Unhedged and hedged revenues for wind and hydroelectric companies

Unhedged Hedged

Furthermore, the unique rating model offered by GCube and better access to critical weather data across the industry now makes it more straightforward
than ever to provide upfront pricing estimates for the potential buyer.

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Tailored to your needs
The GCube weather hedge is customized in each case to the buyers specific weather exposure. However, all weather risk transfer contracts have
common terms and follow a common structure:

Location
Firstly, an appropriate weather data source is chosen as close as possible to the location of the buyers exposure, for the purpose of
settling the hedge contract. This data is measured and maintained by an independent third party to provide transparency for both the
buyer and GCube.

Contract Period
Next, the buyer defines the duration of the contract. The contract period can range from months, to seasons, to multiple years. The
duration can be chosen to match other financial obligations and hedges that the buyer already has in place.

Weather Variable
GCube and the buyer then determine a relevant weather variable for the exposure, such as wind speed for a wind energy company and
river flow for a hydroelectric energy company.

Index Trigger
GCube subsequently uses historical weather data to create a suitable index and index trigger that:

Determines when payment to the buyer occurs

Minimises basis risk between observed weather and financial performance

Index-based coverage allows rapid deal settlement since the payment structure is pre-agreed and can be calculated as soon as weather
data is available typically within days of contract expiry. This index-based approach also requires no proof of financial loss from the
buyer.

Payment per Index Unit

Finally, the buyer specifies the notional payment per index to receive, up to a specified contract limit. Limits range in
size from hundreds of thousands to hundreds of millions of US dollars, or other agreed currency.

Throughout the duration of the hedge, the observed index values are calculated daily. If the agreed trigger is breached, payment is due to
the buyer. The size of the payment is proportional to the departure of the observed weather index from the trigger, up to the contract limit.

The price of the hedge depends on the underlying nature of the weather risk that is transferred. Typically, more frequent weather events which result in
more frequent payments to the buyer are more expensive to hedge.

Some contract structures require no upfront premium from the buyer these often take the form of cash flow swaps or collars whereby a wind or
hydroelectric energy company receives payment from the seller when bad weather occurs and pays the seller when good weather occurs.

Contact GCube to discuss which structure best suits your weather exposure.

Flexible contract delivery

With the support of its industry partners, GCube offers a choice of delivery mechanisms for the hedge, depending on the clients preferences. Weather
hedging services can be delivered:

In the form of a Derivative or Re/insurance with an S&P AA- rated insurer

On Lloyds of London syndicate paper (S&P rating A+)

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 GCube is a leading provider of insurance services for renewable energy projects in wind, solar, biofuels, wave, hydro and tidal around
the globe.

Its speciali ed focus and robust underwriting authority offers unparalleled marine, property, liability and political risk insurance
coverage for all renewable energy risks. With over 25 years experience in the renewable energy sector, GCube understands the unique
exposures of these power generation projects and assists its clients in identifying, quantifying and mitigating risk efficiently and
economically while helping them achieve their business objectives.

To learn more about how we can support your insurance coverage requirements, please visit our website at www.gcube-insurance.com.

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London Suite 1640 505 Newport Beach, CA Suite 1300 Renewable Energy Insurance
EC3M 6AL New York, NY 10170 92660 USA St Paul, MN 55102
+44 (0)20 7977 0200 +1.212.863.2211 +1.949.515.9981 +1.651.621.8885
www.gcube-insurance.com
GCube is a leading provider of insurance services for renewable energy projects in wind, solar, biofuels, biomass, wave, tidal, hydro and geothermal around the globe.
Our specialised focus and underwriting authority offers comprehensive property and liability insurance coverage for transit, construction and operational risks.

Authorised and Regulated by the Financial Conduct Authority

GCube is a registered trademark of GCube Underwriting Ltd.
2015 GCube Underwriting Ltd.

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Weather Risk Transfer Case Study
Managing low river flow exposure for a New Zealand hydroelectric energy company

A hydroelectric energy company in New Zealand is exposed to low water Historical river flow, proposed contract trigger, and historical payoffs (for
levels. The energy company buys protection that provides compensation Power Station #1)
when annual river flow is low (below the 15th percentile of historical flow).
Annual River Flow (m3/s) - Power Station #1
250,000
Estimated Weather Impact on Financials (for Power Station #1)
Annual River Flow (m3/s)

200,000
150,000
Estimated Revenue (NZD) 31,300,000 100,000

Good Water Yr (+%) 25% 50,000

0
Bad Water Yr (-%) -20%
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GWY Revenue Incr (NZD) 7,825,000 Trigger Annual Flow

BWY Revenue Decr (NZD) (6,260,000) Historical Contract Payoffs to Buyer - Power Station #1
4
Annual Payoffs (million NZD)

3
3
Analysis of the energy companys financials and historical river flow data 2
suggests the following contract terms. The energy company can purchase 2

1, 3, or 5 year protection. Prices shown are annualized. All contracts settle 1

1
annually (within days of year end) based upon measured river flow during 0
the period.

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Contract terms (for Power Station #1) Financial and weather parameters can be refined to meet buyers price
and risk retention preferences:
Portfolio-1Yr Portfolio-3Yr Portfolio-5Yr
Inception 1/1/2015 1/1/2015 1/1/2015 Financial parameters: Contract length; contract deductible;
maximum contract payment (limit); notional payment per weather
Expiry 12/31/2015 12/31/2017 12/31/2019
index
Index Trigger in 15.0% 15.0% 15.0% Weather parameters: weather variable (river flow1); index trigger
Percentile
Index Trigger in m3/s 127,458 127,458 127,458 Potential benefits of the river flow protection:
Notional (NZD/m3/s) 100 100 100
Offsets costs of unmet demand when water supply is low
Annual Limit (NZD) 6,500,000 6,500,000 6,500,000 Stabilizes electricity prices for customers of energy company
Aggregate Limit (NZD) -- 13,000,000 19,500,000
Premium - 1yr Price 508,000 429,000 391,000 1
Rainfall or snowpack is also possible

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Weather Risk Transfer Case Study
Managing drought exposure for a Canadian hydroelectric energy company

A hydroelectric energy company in Canada is exposed to low water levels. Historical rainfall, proposed contract trigger, and historical payoffs (for
It has two power stations near each other on the same river. The energy Power Stations #1 & #2)
company buys protection that provides compensation when annual
rainfall is low (below the 20th percentile of historical rainfall). Annual Rainfall (mm) - Power Station #1 & #2
4,500
Estimated Weather Impact on Financials (for Power Stations #1 & #2 4,000
3,500
Annual Rainfall (mm)

combined 3,000
2,500
2,000
1,500
Estimated Revenue (CAD) 1,200,000 1,000
500
0
Good Water Yr (+%) 15%

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Bad Water Yr (-%) -15% Trigger Annual Flow

GWY Revenue Incr (CAD) 180,000 Historical Contract Payoffs to Buyer - Power Station #1 & #2
250,000
BWY Revenue Decr (CAD) (180,000) 200,000
Annual Payoffs (CAD)

150,000

Analysis of the energy companys financials and historical rainfall data 100,000
suggests the following contract terms. The energy company can purchase 50,000
1, 3, or 5 year protection. Prices shown are annualized. All contracts settle 0
annually (within days of year-end) based upon measured rainfall during

2011
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the period.

Contract terms (for Power Stations #1 & #2) Financial and weather parameters can be refined to meet buyers price
and risk retention preferences:
Portfolio-1Yr Portfolio-3Yr Portfolio-5Yr
Financial parameters: Contract length; contract deductible;
Inception 10/1/2015 10/1/2015 10/1/2015
maximum contract payment (limit); notional payment per weather
Expiry 9/30/2016 9/30/2018 9/30/2020 index
Index Trigger in 20.0% 20.0% 20.0% Weather parameters: weather variable (rainfall1); index trigger
Percentile
Potential benefits of the river flow protection:
Index Trigger in mm 2,839 2,839 2,839
Notional (CAD/mm) 350 350 350 Reduces upfront cash reserves allowing some capital to be
Annual Limit (CAD) 250,000 250,000 250,000 redeployed elsewhere within energy company
Offsets cost of generating electricity with alternative fuel sources
Aggregate Limit (CAD) -- 500,000 750,000 during drought.
Premium - 1yr Price 36,700 23,300 22,000 1
River flow or snowpack is also possible

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 Historical Wind Generation (MWh) - Wind Farm #1
360

Annual Wind Generation (GWh)

340
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220
200

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Weather Risk Transfer Case Study
Trigger Annual Generation
Protecting a portfolio of wind energy projects in the UK Historical Contract Payoffs to Buyer - Wind Farm #1

Annual Payoffs (x 1,000 GBP)

700
600

A wind energy company in the UK has four wind farms (50 turbines each) Historical
500
wind generation, proposed contract trigger, and historical
400
in different locations and would like to protect its entire portfolio of wind payoffs
300 (example for wind farm #4). The profile for each wind farm is
assets. The energy company buys protection that provides compensation variable,
200 each with payoff triggered three or more times during the period.
100
when power generation is low (below the 10th percentile of historical Total portfolio payoffs are simply the sum of payoffs across all four wind
generation). Historical wind speed data and the turbine manufacturers farms.

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power curve are used to derive a proxy power generation index.
Historical Wind Generation (MWh) - Wind Farm #4
360
Annual Wind Generation (GWh)

Estimated Weather Impact on Financials (for portfolio of wind farms) 340

320
300
280
Estimated Revenue (GBP) 18,465,500 260
240
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Good W Yr (+%) 25% 200

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Bad W Yr (-%) -25%
Trigger Annual Generation
GWY Revenue Incr (GBP) 4,616,375
Historical Contract Payoffs to Buyer - Wind Farm #4
BWY Revenue Decr (GBP) (4,616,375)
Annual Payoffs (x 1,000 GBP)

1600
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1200
1000
Analysis of the portfolio financials and historical power generation 800

suggests the following contract terms. The contract covers all four 600
400
locations, with individual triggers and limits for each. The energy company 200

can purchase 1, 3, or 5 year protection. Prices shown are annualized. All

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contracts settle annually (within days of year end) based upon measured
power generation during the period.
Financial and weather parameters can be refined to meet buyers price
Contract terms (for portfolio of wind farms)
and risk retention preferences:
Location Wind Wind Wind Wind Portfolio- Portfolio-3Yr Portfolio-5Yr
Farm 1 Farm 2 Farm 3 Farm 4 1Yr
Contract length; contract deductible;
Inception -- -- -- -- 1/1/2015 1/1/2015 1/1/2015 maximum contract payment (limit); notional payment per weather
Expiry -- -- -- -- 12/31/2015 12/31/2017 12/31/2019 index
weather variable (wind, synthetic generation);
Index Trigger 10.0% 10.0% 10.0% 10.0% -- -- --
in Percentile index trigger
Index Trigger 259,134 295,127 275,240 246,356 -- -- --
in MWh
Potential benefits of low wind generation protection:
Notional 40 40 40 40 -- -- --
(GBP/MWh)
Increases certainty of future cash flows for project investors
Annual Limit 1,500,000 2,000,000 1,000,000 2,500,000 7,000,000 7,000,000 7,000,000
(GBP) Improves efficiency of capital structure via less conservative cash
Aggregate -- -- -- -- -- 14,000,000 21,000,000 flow assumptions from lenders
Limit (GBP)

Premium - -- -- -- -- 671,000 539,000 533,000

1yr Price

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