Weather risk management company MSI GuaranteedWeather has released a weather-derivative product for solar energy producers that provides protection against adverse impacts associated with cool days combined with high amounts of solar radiation.
Japanese renewable energy company Looop Inc. has partnered with MSIGW to develop a dual-trigger derivative to address the financial impact of this unique combination of weather risks.
While cool yet sunny days were identified as the ‘target’ risk in this case, the nature of a dual-trigger product allows it to be used in a variety of combinations to hedge against financial risk. In this instance, on cool yet sunny days, an electricity provider (whose production source is solar PV panels) may well find its revenue negatively impacted by this combination of weather. Looop and MSIGW jointly developed this weather risk derivative to offer financial payouts based on agreed upon Japan Meteorological Agency (JMA) temperature and solar radiation measurements over a defined period.
“This is an exciting, innovative deal. By fusing solar radiation and temperature data to trigger payments, MSIGW has provided a new risk management tool to Looop – an instrument that can materially help Looop achieve its goal of providing a stable and cost-effective electricity supply to their clients,” said Bradley Hoggatt, Chief Portfolio Manager for MSIGW.
Weather derivatives are a type of financial product that address risks, to both revenue and expenses, caused by meteorological phenomena. Much like parametric weather index insurance, weather derivatives offer the flexibility to incorporate unique contractual terms that can cover meteorological extremes using independent third-party weather data. The aim of this newly developed product is to diminish the risk of a fluctuation in market electricity prices caused by a combination of events – a dual trigger. In this case, with the example of a cool, yet sunny day, the triggers are both lower demand (due to cool temperatures) and higher available volumes of electricity (due to high levels of solar radiation resulting in higher than expected output from the photovoltaic operations).
In the electricity retail business, the cost of nearly every variable fluctuates. Generally, as temperatures fluctuate, the demand for electric power changes as well (and is typically directly correlated). In turn, as the demand fluctuates, so does the market price — this is the simple relationship of supply and demand.
Given these complex interactions, it is easy to see the attractiveness of this product to Looop as it stabilizes financial performance by protecting against risks associated with both temperature (demand-side exposure) and solar radiation (supply-side exposure).
“This dual-trigger weather risk management product represents an innovative step forward in the development of customized weather risk management products for renewable energy providers,” said Brad Davis, President and CEO of MSIGW. “More and more we are seeing dramatic economic impacts caused by unexpected weather, and any business (whether in the renewable segment or elsewhere) that does not seek to protect against weather-driven risks, is operating with a less than complete risk management program.”
This weather risk management product is available globally.
News item from MSIGW