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Corporate Solutions | Weather and Energy
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Weather protection & ELPRO Concepts and products Corporate Solutions, Weather and Energy
Juerg Trueb, September 2014
Corporate Solutions | Weather and Energy 2
Table of content
Swiss Re in the weather markets
Wind – weather risk
Offshore wind – deep dive
Temperature – weather risk
Weather and price risk
Electricity price contingent outage risk (ELPRO)
Reference transactions
page 3
page 5
page 7
page 9
page 11
page 12
page 14
Corporate Solutions | Weather and Energy 3
Swiss Re in the Weather Markets Global presence, market leadership
Swiss Re Offices Weather Professionals
Long-standing experience
Weather protection business established in 1998
Continuous involvement in trading and end provision of weather risk management since then
Global team
A global team of more than 40 weather professionals
Execution capabilities in all geographies
Market leadership
Largest weather protection provider in the world
Track record of product innovation Only full-service insurer with
market leading position More than 30% market share in OTC
weather derivative/insurance market
Leading reinsurer and direct insurer
Over 11,000 employees
Global presence with 48 offices in over 20 countries
Swiss Re Group
Americas New York, Chicago, Houston, Sao Paolo
EMEA /Asia-Pacific Zurich, London, Sydney, Singapore, Johannesburg
Corporate Solutions | Weather and Energy
Weather phenomena are drivers of earnings volatility for many industries
power and gas
agriculture
construction
Swiss Re's Environmental and Commodity Markets (ECM) team offers customised protection against weather, commodity price and power generator outage risks
Wherever there exists a clear relationship between the above factors (given availability of historical data) and a client's revenue or cost level, Swiss Re offers products to hedge the exposure
Product payout is a function of any single risk factor mentioned above or a combination thereof (e.g., temperature and gas price, precipitation and power price, etc.)
Introduction
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Corporate Solutions | Weather and Energy 5
The power production of a wind farm naturally depends on wind speed. The relationship is described below (for a given turbine):
1'5001'7001'9002'1002'3002'5002'7002'9003'1003'300
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Pro
du
cti
on
(M
Wh
)
Power Production
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8
9
10
11
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13
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
No
v
De
c
Win
d S
pe
ed
(m
/s)
0
200
400
600
800
1'000
1'200
1'400
1'600
0 5 10 15 20 25 30 35
KW
Wind Speed (m/s)
Power Curve Average Wind Speed (m/s)
Weather Risk – Wind Protection based on modelled or measured power production
Depending on the availability of historical production information, power production levels can be hedged on the basis of: i) measured wind speeds ii) measured physical production of power
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Corporate Solutions | Weather and Energy
Modelled power production Measured power production
Stage of the wind farm
Planning and financing, early operational phase Fully operational for at least two years
Power production on which hedge is based
Power production as modelled with the inputs of i) satellite-measured wind speeds at the site and ii) the power curve as provided by turbine manufacturer and additional wind studies
Physical power production as measured at the site. This essentially covers wind resource risk, outage risk and grid operator risk as far as not covered by other insurance
Required information
Coordinates of the site, number and type(s) of turbines, power curve of wind farm, feed-in tariffs, power production level to be hedged
Coordinates of the site, number and type(s) of turbines, power curve of wind farm, power production level to be hedged, two years of power production history (log data), feed-in tariffs, information on guarantees provided by turbine manufacturers and grid operator reimbursement scheme
Reasons for applying hedge
Increase leverage ratio and lower lending rates offered by financing banks
Adjust risk/return profile of investment to suit requirements of investors (e.g., pension funds, etc.)
Efficiently cap downside of wind resource risk to manage minimal yearly power sales
Adjust risk/return profile of investment to suit requirements of investors (e.g., pension funds, etc.)
Cover all production risk, locking in the level of power sales required
Structures Put or swap on modelled production Put or swap on measured power production
Weather Risk – Wind Available methods to manage the level of power revenues
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Corporate Solutions | Weather and Energy
Physical damage, project delay and resulting forgone revenues are the main risks
Bad weather leads to project delay and loss of profit
Stand-by costs
Penalties for delayed completion
Foregone revenue from delayed beginning of power generation
Construction projects are impacted by several weather phenomena
High impact: High wind speeds and wave heights
Low impact: Precipitation and low temperatures
Deep dive: Offshore wind What are the risks during the construction phase?
Nysted offshore wind farm (Denmark)
Korea Electic Power Corporation Stand-by time of construction vessels
Physical damage and business interruption led to a loss of EUR 20m
400MW sea cable damaged while trenching. Repair costs USD 30m, undefined loss of revenue
Daily cost of construction vessels standing by between EUR 125k to 600k
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Corporate Solutions | Weather and Energy
A Critical Day is defined as a day on which wind speeds / wave heights exceed pre-agreed thresholds and construction vessels therefore are on stand-by
The cost of bad weather is proportional to the number of 'Critical Days'
Payout of weather protection is calculated as: Number of Critical Days * Cost per Critical Day – Retention
Deep dive: Offshore wind How can the adverse weather risk be insured?
North Sea example: Hourly wind speed distribution – historical m/s
0
10
20
30
19
81
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North Sea example: Monthly number of days with average wind speeds exceeding 8m/s
0%
2%
4%
6%
8%
10%
12%
1 3 5 7 9 11 13 15 17 19 21 23 25
Source: 3Tier weather data Source: 3Tier weather data
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Corporate Solutions | Weather and Energy
Temperature and heating demand are highly correlated
Mild winters result in a loss of revenue for heating oil companies and gas utilities while cold winters may negatively affect other energy companies and the construction industry
Swiss Re offers protection that pays out in mild/cold winters
Weather Risk – Temperature Temperature affects thermal energy demand
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Structures are tailored to client exposure. Basic examples:
Payout determined by sigmoid function and temperature
Payout determined by temperature (HDDs or Gradtagszahlen)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-30 -20 -10 0 10 20 30
Re
lati
ve d
ail
y
he
ati
ng
de
ma
nd
Average daily temperature in degrees Celsius
Illustration: Relationship between temperature and heating demand
Corporate Solutions | Weather and Energy
Weather Risk – Business to client solution Creating add-ons to traditional gas products
Takes risk resulting from weather component against a premium
Carries no additional risk as weather component of gas supply contracts is transferred 1:1 to Swiss Re
Increases stability of heating cost through new contract with gas supplier
Weather risk and commodity price protection can be introduced by gas suppliers as a differentiating feature to their traditional gas products
Weather and commodity price risk covered can then be passed on to Swiss Re (e.g., temperature linked demand volume, one-off payments to retail client if specific temperature threshold are breached, etc.)
Retail client Gas supplier
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Corporate Solutions | Weather and Energy
Weather and price risk Developing a hedging strategy for a gas supplier
Client situation
Utility operating in the heating business
Risk of severely cold or unusually warm winter has medium to high impact on P&L
Client needs
Management of volatile heating demand
Management of volatile gas prices
Preference for low volatility in operating earnings
Natural interest in minimizing cash costs of hedging
Demand and price exposure
Gas demand low & selling excess gas at low price
Gas demand high & buying additional gas at high price
Gas demand high & buying additional gas at low price
Gas demand low & selling excess at high price
Temperature vs.
expectation
Colder
Warmer
Gas price vs. hedged cost
Lower Higher
Price and temperature combinations work either in favour or against gas supplier
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Corporate Solutions | Weather and Energy
In case of an outage, power producers face two kinds of risk which are difficult to hedge simultaneously:
– Volume risk, i.e., forgone power production
– Price risk, i.e., price at which power could have been sold and now potentially has to be bought to meet contractual obligations
ELPRO can be written for an entire fleet of power plants and increases financial stability, especially when the power plants have become less reliable
Electricity Price and Outage Risk (ELPRO) Cover for power plant outage and price risk
Example: German dark spreads (electricity price – cost of power production with coal – CO2 charge)
-15
0
15
30
451
0/2
01
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11
/20
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/20
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/20
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Lost profit Unplanned outage
Strike
Ge
rma
n D
ark
Sp
rea
d in
€/M
Wh
Strike
ELPRO pays out when one (or several) power plants experience a forced outage and the relevant margin (or market price) exceeds a defined threshold
In essence, ELPRO provides protection against forgone profit in case of an outage
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Corporate Solutions | Weather and Energy
Thank you
Juerg Trueb, Environmental and Commodity Markets Direct: +43 285 36 90 Email: [email protected]
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Corporate Solutions | Weather and Energy
Client Motivation Trigger Protection structure Risk Period Currency Limit
German gas whole seller
Hedging out risk of concurrence of high temperature / low gas price or vice versa
HDD and NCG Daily Reference Price
Swap Q1 2013 EUR 1,150,000 to each side
European power producer
Avoid price spikes when cold drives demand up
Heating Degree Days
Heating Degree Day call option
Nov 2011 – Mar 2012
EUR 28,000,000
Dutch building industry
Cover costs when worksite is too cold in winter
"Frost Day", based on Temperature and Wind Chill
Critical day call option Nov 2011 – Feb 2012
EUR 5,000,000
International tour operator
Sales promotion that includes a bet on snowfall
Snowfall Accumulation at Named Location
Binary snowfall call option Jan 2012 CAD 16,000,000
Australian power retailer
Hedge risk of being short when demand is high
Temperature and System Load
Temperature- and demand-triggered call option on power
Nov 2011 – Mar 2012
AUD 22,000,000
European Power Producer
Avoid demand driven price spikes
Heating Degree Days
Heating Degree Day Call Option
Nov 2011 – Feb 2012
EUR 21,000,000
German gas whole seller
Hedging out risk of warm Shoulder Month
Cumulative Average Temperature
Put on Cumulative Average Temperature
Apr 2010 EUR 5,000,000
Reference Transactions
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Corporate Solutions | Weather and Energy
Client Motivation Trigger Protection structure Risk Period Currency Limit
UK power producer
Reduce extreme volatility in operating profits
Temperature and Gas Price
Temperature collar (offsetting put and call with dead zone) gas-settled
Oct 2011 – Mar 2012
GBP 18,000,000
Chinese Hydropower Generator
Protection against unseasonably low rainfall
Precipitation Index Rainfall Put Option Jan 2012 – Dec 2012
CNY 64,000,000 (10m USD)
UK retail gas supplier
Integrity of price hedging Temperature/Wind Index and gas price
Composite Weather Variable Call
Jan 2012– Apr 2012
GBP 20,000,000
North American natural gas and electricity retailer
Avoid demand driven price spikes
Temperature Index and Power Price
Weather call and power put
May 2012 – Aug 2012
USD 50,000,000
US Power Generator
Avoid demand driven price spikes
Temperature Strike Critical Day Put Option
May 2012 – Aug 2012
USD 20,000,000
Australian electricity retailer
Hedge for Temperature Based Demand
Temperature and System Load
Load Call Option Oct 2012 AUD 30,000,000
UK retail gas supplier
Hedge for Temperature Driven Demand
Temperature/Wind Index
Composite Weather Variable Swap
Oct 2012 – Dec 2012
GBP 2,500,000
Reference Transactions (cont'd)
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Corporate Solutions | Weather and Energy
Legal notice
©Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it or any part of it for commercial or other public purposes without the prior written permission of Swiss Re. This presentation is for general information purposes only, and nothing herein constitutes an offer to enter into any transaction. Neither Swiss Re nor any of its affiliates is acting as an adviser, and nothing herein is a recommendation or advice that a transaction is appropriate for you or meets your specific financial objectives. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation.
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