P50 Risk Solutions

About

A formidable risk in the renewable energy sector is weather variability, especially for wind energy. Weather variability translates to revenue variability, which has a direct effect on the ability of projects to meet their debt obligations. Banks take a conservative approach to this risk, and this limits the availability and cost of capital for renewables.

P50 Risk Solutions is an insurance product that guarantees a minimum level of revenue generation against the payment of an upfront annual insurance premium. If the revenue during the year falls below this level, the insurer makes up for the difference (up to a maximum predetermined cap). The product is designed so that the customer has certainty of achieving a minimum revenue with 90% probability, increasing the level and reducing the volatility in projected revenues.

Banks make their investment decisions on the projected levels of revenues. The increase in levels and reduction in volatility of the projected revenue has the possible impact of:

  • Increasing the project debt-equity ratio
  • Reducing the cost of debt
  • Relaxing banks’ conservative lending practices
  • Introducing new sources of institutional debt and equity capital

This has a net effect of reducing the cost of capital and increasing the availability of new investment sources.

P50 Risk Solutions is structured so that, first, an insurance underwriter prices the insurance using the Wind Resource Assessment of the project as the main source of data. In keeping with IRDA regulatory requirements, a domestic insurer front-ends the insurance with the customer, and signs a reinsurance treaty with the underwriter. All payments flow through the conduit of this fronting agency, which charges a facilitation fee in the process.

The insurance hedges the ideal energy generating potential of the wind farm, defined as the wind speed applied to the power curve of the turbine, excluding any losses. If the hedged level exceeds the annual cumulative potential, the insurer makes an indemnity payoff to make up for the difference. There is a predetermined maximum cap on this indemnity payoff.