Weather risk management company MSI GuaranteedWeather has launched a weather-derived product for solar energy producers that provides protection from the adverse effects of cool days combined with high levels of sunlight.
Japanese renewable energy company Looop Inc. has partnered with MSIGW to develop a dual-trigger derivative to manage the financial impact of this unique combination of weather risks.
While in this case cool but sunny days were identified as the target risk, a product with two triggers can, by its nature, be used in various combinations to hedge against financial risks. In this case, it is possible that an electricity supplier (whose production source is solar PV modules) negatively affects its income on cool but sunny days due to this weather combination. Looop and MSIGW have jointly developed this weather risk derivative to offer financial disbursements based on agreed temperature and solar radiation measurements by the Japan Meteorological Agency (JMA) over a defined period of time.
“This is an exciting, innovative business. By merging solar radiation and temperature data to trigger payments, MSIGW Looop has made a new risk management tool available – an instrument that can significantly help Looop to achieve its goal of providing its customers with a stable and inexpensive power supply “, said Bradley Hoggatt, chief portfolio manager for MSIGW.
Weather derivatives are a type of financial product that counteracts risks for both income and expenses caused by meteorological phenomena. Similar to parametric weather index insurance, weather derivatives offer the flexibility to include unique contract terms that can cover meteorological extremes using independent third-party weather data. The goal of this newly developed product is to reduce the risk of fluctuation in market electricity prices due to a combination of events – a double trigger. In this case, using the example of a cool but sunny day, the triggers are both a lower demand (due to cool temperatures) and a higher volume of available electricity (due to high solar radiation, which results in higher than expected photovoltaic performance).
In electricity retailing, costs fluctuate for almost every variable. In general, with fluctuating temperatures, the demand for electrical energy also changes (and is typically directly correlated). When demand fluctuates, so does the market price – this is the simple relationship between supply and demand.
Given these complex interactions, it is easy to see the appeal 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 is an innovative advancement in the development of bespoke weather risk management products for renewable energy providers,” said Brad Davis, president and CEO of MSIGW. “We’re seeing more and more dramatic economic repercussions caused by unexpected weather, and any company (whether in the renewable segment or elsewhere) that does not want to protect against weather-related risks has a less than complete risk management program. ”
This weather risk management product is available worldwide.
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