The Case for Volume Risk Transfer in Wind Project Finance: Value Creation Through Risk Reallocation

Abstract

The growth of commercial-scale wind power generation has exposed a gap in the energy industry’s toolset for risk management: supply-side volume hedging. While niche wind volume hedging instruments exist today, the market for these instruments remains small and poorly integrated with the financing process. This incomplete market for risk can have a significant, negative impact on the financial performance of a wind project as lenders, assuming near-worst case scenarios for wind volume, restrict access to debt financing. This paper demonstrates how the use of wind volume hedging instruments can create value through efficient risk reallocation. While the impact of risk transfer instruments varies by project and by contract type, our analysis indicates that new value can be created through their use. In every one of the thirty-three hedging scenarios we analyzed, project net present value increased through the implementation of a wind volume hedge.