Post on 07-Jul-2020
AGCS Expert Days
Karsten Berlage02 November 2017
WEATHER RISK SOLUTIONSSUPPORTING GREEN ENERGY EXPANSION
Allianz Risk Transfer
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6-Nov-17 2
WEATHER IS A BUSINESS, WHY?
Benjamin Franklin
“Whilst some people are weather wise, most are otherwise.”
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6-Nov-17 3
IN THE NEWS
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6-Nov-17 4
MANY DIFFERENT PEOPLE DEPEND ON THE WEATHER
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6-Nov-17 5
WEATHER RISK
HIGH FREQUENCY - LOW IMPACT - CUMULATIVE EFFECT
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6-Nov-17 6
WEATHER RISK
VOLUME x PRICE = VALUE
WEATHER = VOLUMEVolume of supply, Volume of demand
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6-Nov-17 7
INCREASED ATTENTION OF STAKEHOLDERS
• Both debt and equity analysts are examining the methods companies employ to manage risk against volatile demand and prices
• Increased attention paid to those companies who bolster credit measures and reduce business risks– Path to stability is predicated on continuing to buoy
earnings quality and credit quality• Financial statements are awash with comments blaming
poor performance on weather– This is no longer accepted by stakeholders
• Product objectives– Protect against poor weather conditions– Stabilize revenue– Improve risk/return profile– Increase capital efficiency
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6-Nov-17 8
“WEATHER HEDGING INCREASES FIRM VALUE”
University Study on Risk Management and Firm Value:• This paper examines the impact of financial
innovation on firm value, investment, and financing decisions. More specifically, the effect of the introduction of weather derivatives for electric and gas utilities
• Using data from U.S. energy firms, it found that weather derivatives lead to higher market valuations, investments, and leverage
• Overall, the results demonstrated that financial innovation can significantly affect company results and that risk management meaningfully affects valuation, investments, and financing decisions
Source: Risk Management and Firm Value: Evidence from Weather Derivatives. Francisco Pérez-González, Stanford University and NBER Hayong Yun University of Notre Dame, June 2011
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6-Nov-17 9
RATING AGENCIES FOCUS ON WEATHER EFFECTS ON CREDIT
• S&P takes a renewed interest in the weather
• S&P Special report 05 September 2012
• “From the fields to the shopping cart, the impact of the most severe U.S.drought since the 1950s has been broad, with nearly half of the nation’scounties declared as natural disaster areas. Although the drought is having arelatively modest effect on our corporate ratings so far, should it continuethrough the 2013 growing season, the credit ramifications will be wider andmore serious.”
Source: Standard & Poor’s Credit Week: The Global Authority On Credit Quality, “Dry as a Bone”, September 5, 2012.
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6-Nov-17 10
VOLUME RISK IS NOT COVERED BY TRADITIONAL RISK MANAGEMENT INSTRUMENTS
Risks
Pricing
P&CInterest
Rates, FX
Operational
Volumetric
Credit
Traditional Risk Management
• Traditional risk management instruments include insurance, swaps, futures, options, rules, guidelines, margining, legal analysis, and control systems
Weather Risk Management
• Volatile weather means variable costs and revenues• Weather is described using business-describing indices• The ability to hedge against the adverse effects of weather using the
described tools allows efficient management of cash flows
Value Creation
• Hedged cash flows improve the risk adjusted returns of a company• Extreme event hedging helps to secure against potentially extreme
financial effects• Volatility hedging helps to smooth cash flows over time
+
=
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WHAT’S IMPORTANT – MEASURE THE WEATHER
Place Period Peril Payout People
• Single station• Location basket
• Annual• Seasonal• Event covers• Multi-year
• Temperature• Precipitation• Wind speed• Sun hours• River flow• Combinations
• Binary• Proportional• Second variable
• Retail customers• Corporations• Institutions• Municipalities• Governments• Organizations
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EXAMPLE: GASTRONOMY
DemandWhen do you order pizza? What is good weather for pizza delivery guys?
Weather allowing for lowest cost of ingredients? Come up with a weather marketing idea for a pizzeria?
Supply Marketing
Distribution/Operations
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EXAMPLE: AGRICULTURE
• Crops are sensitive to different weather perils throughout the planting, growing and harvesting season, such as rainfall, extreme heat and frost
• Total crop yield index (CYI) can be estimated by developing weather sensitivity factors for each crop and region, and multiplying the factors by weather indices (total days during the growing season in excess of 90ºF, planting season rainfall, etc.)
ConstindexFrostfactorFrostindexHeatfactorHeatindexRainfactorRainCYI +×+×+×= )__()__()__(
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• Insolation (lack, volatility)• Heat• Panel degradation• Inverter failure• Construction• Operations and maintenance• Price risks, subsidies
RISKS IN GREEN ENERGY
• Rain fall, River flow• Construction• Price risks
• Wind speed (lack, excess, volatility)• Construction (off shore)• Technical risks• Operations and maintenance• Price risks, subsidies
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EXAMPLE: POWER GENERATION
2011 Wind Speed Variance from Average
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EXAMPLE: POWER GENERATION
70
80
90
100
110
120
130
1975 1980 1985 1990 1995 2000 2005 2010 2015
Uncovered Production Covered Production Covered Volatility
Offshore
Onshore
Power Curve
0
5
10
15
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2.5kW turbine6kW turbine15kW turbine
Pow
er (k
W)
Wind speed (m/s)
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6-Nov-17 17
TWO ELEMENTS OF OUTPUT CONTRIBUTE TO REVENUE:REVENUE = VOLUME OF PRODUCTION X SELLING PRICE
Low Price + High
Production
High Price + High
Production
Low Price + Low
Production
High Price + Low
Production
Revenue Swap Strike
The combination of Price & Volume is key to Revenue Protection
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6-Nov-17 18
PROXY REVENUE SWAP: CUSTOMER DELIVERS VARIABLE REVENUE TO ALLIANZ AND RECEIVES A CONSTANT REVENUE BY ALLIANZ
60
70
80
90
100
110
120
130
1975 1980 1985 1990 1995 2000 2005 2010 2015
% NormNormal
Normal or Average Revenue
Unhedged, volatile, modelled revenue delivered by customer
Resultant Constant Revenue paid to customer = Swap Strike
Rev
enue
Time
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6-Nov-17 19
PROXY REVENUE SWAP
• Allianz delivers to client a certain cash flow stream
• Allianz assumes wind risk and power price risk
• Creating a “tolling agreement” style cash flow stream
• Clients desire a long tenor to match financing conditions
• Settlement annually or on another pre-agreed frequency
• Claims settlement quickly to enhance cash flow profile
• Terms are set to meet client’s objectives and budget
• Successfully executed in the United States to facilitate
– Wind farms yet to be constructed
– Wind farms that are in production and up for sale
• Provide favourable financing terms & higher project values
• Pipeline includes projects outside the US
Protect wind intermittency risk and power price risk
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INFORMATION REQUIREMENTS & INDICATIVE SOLUTION
Allianz needs some informationfrom the generators
• Location: where is it, map?• Turbine information: What type,
manufacturer, how many, hub height?
• Phase: In planning, construction, operation, wind study, met mast data?
• Value and tenure: How will the electricity be sold and for how long, free market, PPA?
• Hedging goals: Lack of wind / sun hours / river flow, volatility, financing?
Wind data is critical to establish a proposal
• On-site wind data• Met stations• Modelled data
Establish insurance cover
• Allianz will use wind/insolation/rain data and turbine information to develop a theoretical generation
• For example, client wants to cover lack of wind/sun/rain at P90 level, i.e. a 10% client retention
• Allianz will pay in case the power generation index falls below the retention level in any year
• The protection may be executed for multiple years to match financing terms
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6-Nov-17 21
BENEFITS OF ALLIANZ WEATHER INSURANCE
Tailored solutions address key volume risk to protect revenues and profits01
Credit enhancement resulting in improved financing terms03
Crucial element of comprehensive risk management02
Stakeholder management06
Fast, objective claims settlement04
Reduction of income volatility allows for improved budgeting05
Mark Twain (1835–1910)
“Everybody talks about the weather, but nobody does anything about it.”
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6-Nov-17 23
WEATHER IS VERY UNPREDICTABLE
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THANK YOU