Speedwell Climate, a leading provider of weather, catastrophe and climate data, indices and settlement services, has teamed up with the European Power Exchange (EPEX SPOT) on the launch of a set of weather-based power indices to provide risk management and hedging opportunities to the renewables sector.
Speedwell has been serving the need of parametric, or index-based, weather risk transfer users since 1999 and recently rebranded as Speedwell Climate.
This latest product collaboration sees Speedwell Climate working with the European Power Exchange (EPEX SPOT), a provider of short-term power markets and part of the wider EEX Group, a service provider to international commodity markets.
The product is a renewable energy focused hedging tool, that features weather as an input on the generation side.
Three types of tradable indices are launching for Great Britain first, starting with a wind index suite this year.
The indices will reflect the value that wind generation can capture on the spot market, enabling lack of wind and its impact on wind farm revenues to be hedged through the financial instrument.
The goal is to roll out the index suite across Europe and expand it to other energy sources as well, after receiving feedback from this first implementation.
The pair explained, “Fluctuating weather conditions create uncertainties on captured market revenues for renewable producers, asset holders and investors alike, as renewable power generation depends on external factors like wind or sun. Therefore, it is challenging for market participants to anticipate in advance not only their power production, but also their impact on the spot price level, and hence the hedging position they choose to open. This means that market participants cannot rely on a steady flow of revenue, as it fluctuates according to production patterns and the market situation.”
The new weather-based power indices factor in the effect of wind fluctuation on the level of the spot power price, so traders can hedge the price and/or volume risk related to wind production with much greater accuracy.
Philippe Vassilopoulos, Director of Product Development at EPEX SPOT, commented on the launch, “Our spot price is a close to real-time reflection of supply and demand. Especially with the rise of renewables, volatility has increased and market participants wish to avoid being exposed to a larger price risk. This unique index suite catches the variation of the spot price due to intermittency of wind production. It is an ideal tool for traders to improve their hedge against price risk and to stabilise their revenue flow.”
Michael Moreno, co-CEO of Speedwell Climate added, “Our proxy wind and solar generation indices have gained considerable traction in the market. As more and more wind and solar plants are installed, renewables are having a profound impact on power price which is impacting all actors in the power market. By combining our indices with the EPEX SPOT prices, we are completing the suite of products available to investors and traders alike to hedge the shape risk that is the relationship between price and renewable power generation.”
Speedwell uses gridded and forecast wind data to compute modelled energy output for production areas across the world, while EPEX power prices and indices are already used across the industry.
This new hedging index will see EPEX SPOT power prices combined with Speedwell modelled wind generation data, producing indices for hedging underlying over different periods of time, including months, quarters, and seasons.
This offering has similaritites to the proxy revenue swap, which may be familiar to many in the insurance-linked securities (ILS) and reinsurance market as a product made famous by Allianz and Nephila Capital, working in partnership with renewable power investors and companies.
There are three quanto indices that combine price and generation, designed to let shape, revenue and price all be addressed for renewable power production based on weather related inputs.
The indices are effectively parametric in nature and can be directly traded against by those in the power markets, as well as other interested parties.