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New instruments developing to hedge power market weather risk: Swiss Re

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New instruments developing to hedge power market weather risk: Swiss Re

Highlights

Devastating weather losses in 2017, 2018

Payouts triggered by wind speed, price, temps

Houston — Electric Reliability Council of Texas market participants have several ways to mitigate wholesale power price risk that can result from unusual weather events, ranging from full-blown catastrophes to unusually mild temperatures, attendees of a Gulf Coast Power Association luncheon learned Thursday.

"We're really on the front line of climate change," said Brian Beebe, Swiss Re senior vice president and head of Americas origination.

North America had its largest losses from hurricanes in insurance history in 2017, totaling $92 billion, and California wildfires caused $14 billion in damages, Beebe said as part of a presentation entitled "Evolving Climate and Renewables Energy Risk Transfer Solutions in ERCOT."

In 2018, hurricanes Florence and Michael caused another $15.3 billion in damages, and California wildfires caused anotehr $16.5 billion in damages, Beebe said.

Hurricanes typically destroy both electricity demand and a generators' ability to produce electricity. One way to mitigate some of the economic risk associated with those events is with a "parametric insurance," through which a customer can pay a premium to guard against such a calamity.

PAYOUT VARIABLES

For example, for three sites in the general path of Hurricane Harvey in 2017, a customer could get a payout of a set amount, up to $5 million a day, if wind speeds of 100 mph or more hit a particularly important site. In contrast, if wind speeds ranged from 65 mph to 74 mph at a less important site, a customer could get a payout of a lesser amount such as $75,000 a day.

Other payout variables could be extraordinarily low or high power prices or electricity load levels in ERCOT.

For example, during 2008's Hurricane Ike, wholesale on-peak electricity prices ranged down to about $5/MWh, when they were at other times that year averaging around $60/MWh.

MOST DEALS OTC

At the opposite end of the risk scale, Beebe said, market participants can hedge against having too few high-temperature days during a period, such as July and August, when ERCOT typically generates high power prices.

Some organized exchanges, such as CME, offer weather futures, typically traded in $/HDD or $/CDD at specific locations. Beebe said Dallas is one of those locations.

However, Beebe said, "The bulk of deal flow is over the counter, as exchange trading isn't really conducive to customized terms."

Various organizations have created an "explosion in data sets" regarding temperatures, wind conditions and other weather-related information, Beebe said, against which hedging instruments can be settled.

"We have much more granular data on weather risk than we may have had five or six years ago," Beebe said.

For example, a wind generation site operator can hedge against wind speeds being at the lowest 1% of the bell curve of probability, known as a "P-99" hedge.

-- Mark Watson, markham.watson@spglobal.com

-- Edited by Jeffrey Ryser, newsdesk@spglobal.com