Weather risk accounts for an estimated US$56 billion in untapped wind energy asset values globally: GCube

Resource underperformance has surpassed mechanical breakdown and component damage as the major obstacle to achieving bankable wind energy projects, GCube Underwriting Ltd. notes in a report estimating the untapped asset values of wind energy stakeholders around the world at US$56 billion.

The estimate is the result of failure to efficiently transfer weather risk, U.S.-based renewable energy underwriter GCube Underwriting reported Tuesday.

“Deviations from expected performance surpass technical failure as the single largest threat to wind energy profitability,” notes a company statement Tuesday.

The report, Gone with the Wind: An Asset Manager’s Guide to Mitigating Wind Power Resource Risk, explores the scale of the threat from resource underperformance to wind energy operators and investors, as well as highlights the size of the market for weather risk transfer (WRT) mechanisms. It is the latest in a series of reports authored for GCube Underwriting’s client base and the wider renewable energy market.

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For a 50 MW (megawatt) onshore wind farm worth US$80 million, successfully mitigating or transferring weather risk could achieve a total net present value (NPV) increase of US$5.8 million, estimates GCube Underwriting, which provides insurance services for renewable energy projects in wind, solar, biofuels, wave, hydro and tidal around the globe.

Compare that to the same 50 MW asset with comprehensive operational all risks (OAR) insurance coverage, which is likely to see just “US$1.5 million on average of financial losses throughout its lifetime attributed to technical failure and associated downtime,” the underwriter reports.

Well-documented recent wind speed lulls in established markets like North America, Europe and Australia – lulls that are often triggered by unforeseen and widespread climatic phenomena – “have affected the ability of operational assets to deliver the outputs that were forecast by resource analysts prior to their construction,” it notes.

“These deviations from expected performance not only impact financial results for project owners, independent power producers and utilities, but have also resulted in damaging ratings downgrades,” the statement continues.

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These issues, GCube Underwriting reports, “demonstrate that resource underperformance has now surpassed mechanical breakdown and component damage as the major obstacle to achieving bankable wind energy projects.”

The insurance market has responded by developing products that offer “long-term reallocation of weather risk, smoothing of project revenues and the opportunity to unlock considerable untapped asset value,” the statement notes.

WRT mechanisms offer compensation in years of resource underperformance, helping to mitigate the financial impact of long-term wind speed fluctuations, it explains.

“In turn, they create certainty in revenue forecasts, which confers a number of benefits for financing and refinancing, alongside the broader risk management, investor confidence and reputational advantages that derive from stable returns,” it adds.

“The industry has realized that underperformance represents the single biggest remaining challenge that stakeholders face during the lifetime of a project,” says Geoffrey Taunton-Collins, co-author of the report and a weather risk analyst for GCube Underwriting. Ltd.

“With the recent rise in refinancing, and significant M&A (mergers and acquisitions) activity predicted for the first half of 2017, particularly in the United States, meeting the resource risk challenge has moved up the agenda as the sector wakes up to the substantial opportunities transferring weather risk effectively can provide for value creation,” Taunton-Collins argues.

Coupled with important recent breakthroughs in the structuring of the product itself, he adds, “this is creating serious momentum for the WRT market.”

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