The Value of Hedging New Approaches to Managing Wind Energy Resource Risk
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The value of hedging New approaches to managing wind energy resource risk Supported by: The value of hedging New approaches to managing wind energy resource risk November 2017 windeurope.org Disclaimer This publication contains information collected and verified with different members of the in- dustry ahead of the publication. Neither WindEurope, nor its members, nor their related entities are, by means of this publication, rendering professional advice or services. Neither WindEurope nor its members shall be responsible for any loss whatsoever sustained by any person who relies on this publication. Swiss Re Corporate Solutions provides risk transfer solutions to large and mid-sized corporations around the world. Its innovative, highly customised products and standard insurance covers help to make businesses more resilient, while its industry-leading claims service provides additional peace of mind. Swiss Re Corporate Solutions serves clients from over 50 offices worldwide and is backed by the financial strength of the Swiss Re Group. Discover more at corporatesolutions.swissre.com. TEXT AND ANALYSIS: Ariola Mbistrova, WindEurope Aloys Nghiem, WindEurope REVISION: Iván Pineda, Wind Europe Benjamin Wilhelm, WindEurope INVESTMENT DATA: Clean Energy Pipeline IJ Global All currency conversions made at EURGBP 0.8605 and EURUSD 1.0830 Figures include estimates for undisclosed values DESIGN: JQ&ROS Visual Communications PHOTO COVER: Sanne Bäck MORE INFORMATION: [email protected] +32 2 213 18 22 EXECUTIVE SUMMARY .................................................................................................... 4 1. INTRODUCTION .................................................................................................................... 5 2. MARKET TRENDS ................................................................................................................. 6 2.1 Wind energy markets today .................................................................................... 6 2.2 Road to 2020 and 2030 .......................................................................................... 8 3. WIND PROJECT FINANCING.......................................................................................... 15 3.1 Debt markets ................................................................................................................. 15 3.2 Equity markets .............................................................................................................. 18 4. GENERATING ELECTRICITY WITH WIND ................................................................. 20 4.1 Annual production 22 ....................................................................................................... CONTENTS 4.2 Seasonality and monthly production .................................................................. 24 4.3 Daily production ............................................................................................................ 27 5. HEDGING WIND CAN CREATE VALUE ...................................................................... 29 5.1 Why there is a need for hedging ........................................................................... 30 5.2 How hedging creates value ..................................................................................... 33 EXECUTIVE SUMMARY By 2030 installed wind power capacity in Europe could double to 323 GW: 253 GW onshore and 70 GW offshore wind. The anticipated growth of the wind energy sector could require an additional €239bn in investments between 2016 and 2030. As the industry transitions to auctions and feed-in-premiums for allocating renewable energy support, wind power projects are getting more exposed to market risks. With the growth of the wind power sector and the increased market exposure there will be a need for credit enhance- ment solutions and structured products that transfer the risks from the project company to a counterparty willing to accept these risks. This report studies the potential impact of hedging the variability of wind energy generation. KEY FINDINGS • Hedging can also impact the capital structure of a • By 2030 only 6% of the European wind capacity – from project, by creating more debt capacity and enhancing 75% today – will be fully protected against market risk adjusted returns. WindEurope estimates €239bn risks through support schemes. 67% of the capacity in investments by 2030 to finance an additional by 2030 will be partially exposed to power markets, 170 GW of new wind energy assets. Project finance and 27% will be fully exposed. debt has raised on average 70% and 40% of the capital requirements needed for onshore and offshore wind • By 2030 there will be at least 190 TWh per year of projects respectively. market potential for hedging instruments against price risk. This would be the equivalent of the electricity • An average wind farm of 30 MW may need to hedge demand of a country such as Poland. for +/-10% annual variations in its production forecast. Risk management services such as hedging could • Hedging the wind resource risk would provide revenue extract a value worth €2.5bn for new wind assets stabilisation and cash flow predictability to asset installed between 2017 and 2020. This may go up owners. By reducing the variability of the returns, to €7.6bn for new wind power installations between cash flows move closer to the profile of a fixed-income 2017 and 2030. investment, similar to a bond. If the hedge provider is a high-grade counterparty, then the expected yield could be in the range of 3-4%. 5 The value of hedging: new approaches to managing wind resource risk WindEurope 1. INTRODUCTION This report studies the potential impact of hedging the The first auctions in Europe have delivered cost reduc- variability of wind energy generation. With the growth of tions with record low prices - some even as low as zero. the wind power sector, we expect these wind energy de- However, the short-term spot price does not deliver ade- rivative products to open up the market to new and risk quate economics to pay for new wind energy investments. averse investors and improve the credit standing of mer- Additionally, there is uncertainty related to the volume of chant wind power financing. sales. While auctions partially limit a project’s exposure to price risk, uncertainty on the volume of sales remains Historically, the inability to lock in a portion of revenue has entirely with the asset owners. As a result, merchant risk not hurt the ability of the industry to finance a very large exposure – or the uncertainty on both price and volume – amount of growth. The policy support schemes for renew- is likely to arise in the future. able energy took away most of the market risk from pow- er generating assets. In some countries, power purchase Without a long-term mechanism in place that can under- agreements had a similar effect – paying a fixed price for pin returns and limit the risks for wind energy developers, the power that was actually produced. the project runs the risk of not generating enough reve- nue to cover all its obligations, including the servicing of Those support mechanisms are rapidly coming to an debt and the dividends to shareholders. The more volatile end. In 2014 the European Commission introduced new the revenues become for asset owners, the higher will rules on allocating support for renewable energy sources. be the need for credit enhancement solutions and wind Those changes are taking effect today with a shift towards derivative products able to transfer market risks from the competitive tender mechanisms and the use of market asset owner to a counterparty willing to accept them. based mechanisms. As a result, several Member States have already moved towards feed-in premiums for utili- To assess the variability of wind and the potential impact ty scale renewable energy generators, restricting the use of hedging instruments on the cost of capital, the report of feed-in tariffs to small installations and emerging tech- uses 20-year time series from a portfolio of wind farms nologies. Feed-in tariffs still remain the dominant support in Southern Europe. The value creation of hedging in the scheme in Finland and Ireland, but their application is ex- energy commodity business, its applicability to wind and pected to come to an end by 2018. the market potential for such instruments are further ex- plored in this report. The value of hedging: new approaches to managing wind resource risk 6 WindEurope 2. MARKET TRENDS 2.1 WIND ENERGY MARKETS TODAY Wind power capacity in the European Union reached over the last decade. Out of the total installed capacity 159.8 GW at the end of June 2017, with installa- in the EU, 145.5 GW are in onshore wind and the re- tions increasing at an average annual rate of 11 GW maining 14.3 GW in offshore wind. FIGURE 1 Annual wind energy market until the first half of 2017 14 180 3 1.6 12 1.2 1.6 1.5 160 0.6 140 0.9 0.8 10 (GW) 0.3 120 0.3 8 0.1 100 0.1 1.3 80 6 capacity GW 60 4 40 2 6.5 7.1 8.6 8.1 9.7 9 8.9 10.9 10 10.5 9.8 10.9 4.8 20 0 0 Cumulative 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H1 Onshore Offshore Cumulative installations Source: WindEurope Germany leads the European wind energy markets, gy markets account for over 72% of the total installed with 33% of the total installed capacity. Spain, UK, wind power capacity in the EU. France and Italy follow. These five biggest wind ener- 7 The value of hedging: new approaches to managing wind