Firms will hedge bets as prices tumble

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Richard Heap
December 4, 2017
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This content is from our archive. Some formatting or links may be broken.
Firms will hedge bets as prices tumble

The plummeting cost of onshore and offshore wind was a major talking point at WindEurope’s annual conference in Amsterdam last week. And, whether you were there or not, this affects us all.

Now, you don’t need to be a genius to know why costs are falling. Governments have been getting rid of centrally-set feed-in tariffs in favour of competitive tenders as they look to reduce subsidies.

The auctions have drawn some very bullish bids from developers, driven in part by ambitious projections from manufacturers. Each new auction seems to bring a new shock. As a result, many more projects will be exposed to market power price risk than in the past.

We should not underestimate the scale of this change. In Europe today, only 25% of wind capacity is exposed to market risks in any way, WindEurope said last week. However, by 2030 around 94% of capacity could be exposed to market prices to some extent: 67% partially and 27% fully. That is a massive change.

And we heard at the conference about various ways that wind farm owners could smooth out some of the fluctuations these will bring.

Gunnar Groebler, head of wind at Swedish utility Vattenfall, argued more European nations should adopt regimes like the Contracts for Difference system used for offshore wind in the UK, as CfDs help both project owners and governments to mitigate power price risks.

Then there are the corporate power purchase agreements, which can give wind farm owners protection from merchant power prices – well, as long as the PPA lasts.

And this new-found appreciation of market power price risk is also raising awareness of hedging products offered by insurers. These aren’t exactly new: we have known for years about the insurance products that protect wind farm owners in case schemes do not achieve either the expected power prices or the volumes of power sales. We just haven’t chosen to write about them as, frankly, they haven't seemed all that interesting!

Until now, that is. In an era where 94% of projects will be exposed to market power price risk, techniques to mitigate those risks – like hedging – could be vital. This is why WindEurope published a report called ‘The Value of Hedging’ last week that gives firms a crash course in what hedging is, and puts figures to it.

So what does the report say? First, it highlights that installed wind capacity in Europe could double to 323GW by 2030 – with 253GW onshore and 70GW offshore. The 170GW of extra wind farms are set to require an additional €239bn by 2030 and, with the increased risks to returns, investors will look for more protection.

That is where hedging products come in. The report says that, by 2030, there could be at least 190TWh per year of market potential for hedging instruments. This is roughly equivalent to electricity demand in Poland today. And it argues that hedging could create €7.6bn of value for new wind installations in the years to 2030.

Some wind farm owners are already using these products to help them cope with the seasonally-fluctuating production from wind farms. Owners can already expect 30%-45% more production in windier winter months than in the summer, and so they use hedging products to smooth out their returns. This is set to be particularly useful for risk-averse investors like insurers and pension funds that rely on steady returns for their own investors.

Now, in one respect, the report doesn't tell us anything that new. It is putting figures on the growth we could see in this relatively niche part of the market, which is useful, but it is also talking about risk mitigation products that have been around for years.

And that’s the point. Hedging products aren’t new, but the fact we are writing about them is. Falling power prices will mean more risks for wind farm operators, and it is the smart investors that will look at all the tools they can to mitigate those risks. If last week has made anything clear it is that these risks are here to stay.

The plummeting cost of onshore and offshore wind was a major talking point at WindEurope’s annual conference in Amsterdam last week. And, whether you were there or not, this affects us all.

Now, you don’t need to be a genius to know why costs are falling. Governments have been getting rid of centrally-set feed-in tariffs in favour of competitive tenders as they look to reduce subsidies.

The auctions have drawn some very bullish bids from developers, driven in part by ambitious projections from manufacturers. Each new auction seems to bring a new shock. As a result, many more projects will be exposed to market power price risk than in the past.

We should not underestimate the scale of this change. In Europe today, only 25% of wind capacity is exposed to market risks in any way, WindEurope said last week. However, by 2030 around 94% of capacity could be exposed to market prices to some extent: 67% partially and 27% fully. That is a massive change.

And we heard at the conference about various ways that wind farm owners could smooth out some of the fluctuations these will bring.

Gunnar Groebler, head of wind at Swedish utility Vattenfall, argued more European nations should adopt regimes like the Contracts for Difference system used for offshore wind in the UK, as CfDs help both project owners and governments to mitigate power price risks.

Then there are the corporate power purchase agreements, which can give wind farm owners protection from merchant power prices – well, as long as the PPA lasts.

And this new-found appreciation of market power price risk is also raising awareness of hedging products offered by insurers. These aren’t exactly new: we have known for years about the insurance products that protect wind farm owners in case schemes do not achieve either the expected power prices or the volumes of power sales. We just haven’t chosen to write about them as, frankly, they haven't seemed all that interesting!

Until now, that is. In an era where 94% of projects will be exposed to market power price risk, techniques to mitigate those risks – like hedging – could be vital. This is why WindEurope published a report called ‘The Value of Hedging’ last week that gives firms a crash course in what hedging is, and puts figures to it.

So what does the report say? First, it highlights that installed wind capacity in Europe could double to 323GW by 2030 – with 253GW onshore and 70GW offshore. The 170GW of extra wind farms are set to require an additional €239bn by 2030 and, with the increased risks to returns, investors will look for more protection.

That is where hedging products come in. The report says that, by 2030, there could be at least 190TWh per year of market potential for hedging instruments. This is roughly equivalent to electricity demand in Poland today. And it argues that hedging could create €7.6bn of value for new wind installations in the years to 2030.

Some wind farm owners are already using these products to help them cope with the seasonally-fluctuating production from wind farms. Owners can already expect 30%-45% more production in windier winter months than in the summer, and so they use hedging products to smooth out their returns. This is set to be particularly useful for risk-averse investors like insurers and pension funds that rely on steady returns for their own investors.

Now, in one respect, the report doesn't tell us anything that new. It is putting figures on the growth we could see in this relatively niche part of the market, which is useful, but it is also talking about risk mitigation products that have been around for years.

And that’s the point. Hedging products aren’t new, but the fact we are writing about them is. Falling power prices will mean more risks for wind farm operators, and it is the smart investors that will look at all the tools they can to mitigate those risks. If last week has made anything clear it is that these risks are here to stay.

The plummeting cost of onshore and offshore wind was a major talking point at WindEurope’s annual conference in Amsterdam last week. And, whether you were there or not, this affects us all.

Now, you don’t need to be a genius to know why costs are falling. Governments have been getting rid of centrally-set feed-in tariffs in favour of competitive tenders as they look to reduce subsidies.

The auctions have drawn some very bullish bids from developers, driven in part by ambitious projections from manufacturers. Each new auction seems to bring a new shock. As a result, many more projects will be exposed to market power price risk than in the past.

We should not underestimate the scale of this change. In Europe today, only 25% of wind capacity is exposed to market risks in any way, WindEurope said last week. However, by 2030 around 94% of capacity could be exposed to market prices to some extent: 67% partially and 27% fully. That is a massive change.

And we heard at the conference about various ways that wind farm owners could smooth out some of the fluctuations these will bring.

Gunnar Groebler, head of wind at Swedish utility Vattenfall, argued more European nations should adopt regimes like the Contracts for Difference system used for offshore wind in the UK, as CfDs help both project owners and governments to mitigate power price risks.

Then there are the corporate power purchase agreements, which can give wind farm owners protection from merchant power prices – well, as long as the PPA lasts.

And this new-found appreciation of market power price risk is also raising awareness of hedging products offered by insurers. These aren’t exactly new: we have known for years about the insurance products that protect wind farm owners in case schemes do not achieve either the expected power prices or the volumes of power sales. We just haven’t chosen to write about them as, frankly, they haven't seemed all that interesting!

Until now, that is. In an era where 94% of projects will be exposed to market power price risk, techniques to mitigate those risks – like hedging – could be vital. This is why WindEurope published a report called ‘The Value of Hedging’ last week that gives firms a crash course in what hedging is, and puts figures to it.

So what does the report say? First, it highlights that installed wind capacity in Europe could double to 323GW by 2030 – with 253GW onshore and 70GW offshore. The 170GW of extra wind farms are set to require an additional €239bn by 2030 and, with the increased risks to returns, investors will look for more protection.

That is where hedging products come in. The report says that, by 2030, there could be at least 190TWh per year of market potential for hedging instruments. This is roughly equivalent to electricity demand in Poland today. And it argues that hedging could create €7.6bn of value for new wind installations in the years to 2030.

Some wind farm owners are already using these products to help them cope with the seasonally-fluctuating production from wind farms. Owners can already expect 30%-45% more production in windier winter months than in the summer, and so they use hedging products to smooth out their returns. This is set to be particularly useful for risk-averse investors like insurers and pension funds that rely on steady returns for their own investors.

Now, in one respect, the report doesn't tell us anything that new. It is putting figures on the growth we could see in this relatively niche part of the market, which is useful, but it is also talking about risk mitigation products that have been around for years.

And that’s the point. Hedging products aren’t new, but the fact we are writing about them is. Falling power prices will mean more risks for wind farm operators, and it is the smart investors that will look at all the tools they can to mitigate those risks. If last week has made anything clear it is that these risks are here to stay.

The plummeting cost of onshore and offshore wind was a major talking point at WindEurope’s annual conference in Amsterdam last week. And, whether you were there or not, this affects us all.

Now, you don’t need to be a genius to know why costs are falling. Governments have been getting rid of centrally-set feed-in tariffs in favour of competitive tenders as they look to reduce subsidies.

The auctions have drawn some very bullish bids from developers, driven in part by ambitious projections from manufacturers. Each new auction seems to bring a new shock. As a result, many more projects will be exposed to market power price risk than in the past.

We should not underestimate the scale of this change. In Europe today, only 25% of wind capacity is exposed to market risks in any way, WindEurope said last week. However, by 2030 around 94% of capacity could be exposed to market prices to some extent: 67% partially and 27% fully. That is a massive change.

And we heard at the conference about various ways that wind farm owners could smooth out some of the fluctuations these will bring.

Gunnar Groebler, head of wind at Swedish utility Vattenfall, argued more European nations should adopt regimes like the Contracts for Difference system used for offshore wind in the UK, as CfDs help both project owners and governments to mitigate power price risks.

Then there are the corporate power purchase agreements, which can give wind farm owners protection from merchant power prices – well, as long as the PPA lasts.

And this new-found appreciation of market power price risk is also raising awareness of hedging products offered by insurers. These aren’t exactly new: we have known for years about the insurance products that protect wind farm owners in case schemes do not achieve either the expected power prices or the volumes of power sales. We just haven’t chosen to write about them as, frankly, they haven't seemed all that interesting!

Until now, that is. In an era where 94% of projects will be exposed to market power price risk, techniques to mitigate those risks – like hedging – could be vital. This is why WindEurope published a report called ‘The Value of Hedging’ last week that gives firms a crash course in what hedging is, and puts figures to it.

So what does the report say? First, it highlights that installed wind capacity in Europe could double to 323GW by 2030 – with 253GW onshore and 70GW offshore. The 170GW of extra wind farms are set to require an additional €239bn by 2030 and, with the increased risks to returns, investors will look for more protection.

That is where hedging products come in. The report says that, by 2030, there could be at least 190TWh per year of market potential for hedging instruments. This is roughly equivalent to electricity demand in Poland today. And it argues that hedging could create €7.6bn of value for new wind installations in the years to 2030.

Some wind farm owners are already using these products to help them cope with the seasonally-fluctuating production from wind farms. Owners can already expect 30%-45% more production in windier winter months than in the summer, and so they use hedging products to smooth out their returns. This is set to be particularly useful for risk-averse investors like insurers and pension funds that rely on steady returns for their own investors.

Now, in one respect, the report doesn't tell us anything that new. It is putting figures on the growth we could see in this relatively niche part of the market, which is useful, but it is also talking about risk mitigation products that have been around for years.

And that’s the point. Hedging products aren’t new, but the fact we are writing about them is. Falling power prices will mean more risks for wind farm operators, and it is the smart investors that will look at all the tools they can to mitigate those risks. If last week has made anything clear it is that these risks are here to stay.

The plummeting cost of onshore and offshore wind was a major talking point at WindEurope’s annual conference in Amsterdam last week. And, whether you were there or not, this affects us all.

Now, you don’t need to be a genius to know why costs are falling. Governments have been getting rid of centrally-set feed-in tariffs in favour of competitive tenders as they look to reduce subsidies.

The auctions have drawn some very bullish bids from developers, driven in part by ambitious projections from manufacturers. Each new auction seems to bring a new shock. As a result, many more projects will be exposed to market power price risk than in the past.

We should not underestimate the scale of this change. In Europe today, only 25% of wind capacity is exposed to market risks in any way, WindEurope said last week. However, by 2030 around 94% of capacity could be exposed to market prices to some extent: 67% partially and 27% fully. That is a massive change.

And we heard at the conference about various ways that wind farm owners could smooth out some of the fluctuations these will bring.

Gunnar Groebler, head of wind at Swedish utility Vattenfall, argued more European nations should adopt regimes like the Contracts for Difference system used for offshore wind in the UK, as CfDs help both project owners and governments to mitigate power price risks.

Then there are the corporate power purchase agreements, which can give wind farm owners protection from merchant power prices – well, as long as the PPA lasts.

And this new-found appreciation of market power price risk is also raising awareness of hedging products offered by insurers. These aren’t exactly new: we have known for years about the insurance products that protect wind farm owners in case schemes do not achieve either the expected power prices or the volumes of power sales. We just haven’t chosen to write about them as, frankly, they haven't seemed all that interesting!

Until now, that is. In an era where 94% of projects will be exposed to market power price risk, techniques to mitigate those risks – like hedging – could be vital. This is why WindEurope published a report called ‘The Value of Hedging’ last week that gives firms a crash course in what hedging is, and puts figures to it.

So what does the report say? First, it highlights that installed wind capacity in Europe could double to 323GW by 2030 – with 253GW onshore and 70GW offshore. The 170GW of extra wind farms are set to require an additional €239bn by 2030 and, with the increased risks to returns, investors will look for more protection.

That is where hedging products come in. The report says that, by 2030, there could be at least 190TWh per year of market potential for hedging instruments. This is roughly equivalent to electricity demand in Poland today. And it argues that hedging could create €7.6bn of value for new wind installations in the years to 2030.

Some wind farm owners are already using these products to help them cope with the seasonally-fluctuating production from wind farms. Owners can already expect 30%-45% more production in windier winter months than in the summer, and so they use hedging products to smooth out their returns. This is set to be particularly useful for risk-averse investors like insurers and pension funds that rely on steady returns for their own investors.

Now, in one respect, the report doesn't tell us anything that new. It is putting figures on the growth we could see in this relatively niche part of the market, which is useful, but it is also talking about risk mitigation products that have been around for years.

And that’s the point. Hedging products aren’t new, but the fact we are writing about them is. Falling power prices will mean more risks for wind farm operators, and it is the smart investors that will look at all the tools they can to mitigate those risks. If last week has made anything clear it is that these risks are here to stay.

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Become a member of the 6,500-strong A Word About Wind community today, and gain access to our premium content, exclusive lead generation and investment opportunities.