Mitigating wind exposure with zero-cost collar insurance

Abstract

Renewable energy generation worldwide has relied increasingly on wind farms where wind energy is transformed into electricity. On the other hand, electricity prices are uncertain and wind speeds are highly variable, which exposes the producer to risks. Typically wind power producers enter into long term fixed price contracts in order to hedge against energy price risk, but these contracts expose the wind farm to energy volume risk, as they require delivery of the full amount of energy contracted, even if energy production falls short due to low wind speeds. To mitigate this risk, wind producers can purchase insurance. This article proposes a zero-cost collar insurance and develop a stochastic model to determine the feasible range of wind strikes for both the wind farm and the insurer. The results indicate there is a set of possible strike combinations that meets the objectives of both parties.