allianz whether risk solutions [read-only] · 2020-02-15 · futures, options, rules, guidelines,...

AGCS Expert Days

Karsten Berlage02 November 2017

WEATHER RISK SOLUTIONSSUPPORTING GREEN ENERGY EXPANSION

Allianz Risk Transfer

© Copyright ART GroupAGCS Expert Days 2017 │ Explore. With Us

6-Nov-17 2

WEATHER IS A BUSINESS, WHY?

Benjamin Franklin

“Whilst some people are weather wise, most are otherwise.”


6-Nov-17 3

IN THE NEWS


6-Nov-17 4

MANY DIFFERENT PEOPLE DEPEND ON THE WEATHER


6-Nov-17 5

WEATHER RISK

HIGH FREQUENCY - LOW IMPACT - CUMULATIVE EFFECT


6-Nov-17 6

WEATHER RISK

VOLUME x PRICE = VALUE

WEATHER = VOLUMEVolume of supply, Volume of demand


6-Nov-17 7

INCREASED ATTENTION OF STAKEHOLDERS

• Both debt and equity analysts are examining the methods companies employ to manage risk against volatile demand and prices

• Increased attention paid to those companies who bolster credit measures and reduce business risks– Path to stability is predicated on continuing to buoy

earnings quality and credit quality• Financial statements are awash with comments blaming

poor performance on weather– This is no longer accepted by stakeholders

• Product objectives– Protect against poor weather conditions– Stabilize revenue– Improve risk/return profile– Increase capital efficiency


6-Nov-17 8

“WEATHER HEDGING INCREASES FIRM VALUE”

University Study on Risk Management and Firm Value:• This paper examines the impact of financial

innovation on firm value, investment, and financing decisions. More specifically, the effect of the introduction of weather derivatives for electric and gas utilities

• Using data from U.S. energy firms, it found that weather derivatives lead to higher market valuations, investments, and leverage

• Overall, the results demonstrated that financial innovation can significantly affect company results and that risk management meaningfully affects valuation, investments, and financing decisions

Source: Risk Management and Firm Value: Evidence from Weather Derivatives. Francisco Pérez-González, Stanford University and NBER Hayong Yun University of Notre Dame, June 2011


6-Nov-17 9

RATING AGENCIES FOCUS ON WEATHER EFFECTS ON CREDIT

• S&P takes a renewed interest in the weather

• S&P Special report 05 September 2012

• “From the fields to the shopping cart, the impact of the most severe U.S.drought since the 1950s has been broad, with nearly half of the nation’scounties declared as natural disaster areas. Although the drought is having arelatively modest effect on our corporate ratings so far, should it continuethrough the 2013 growing season, the credit ramifications will be wider andmore serious.”

Source: Standard & Poor’s Credit Week: The Global Authority On Credit Quality, “Dry as a Bone”, September 5, 2012.


6-Nov-17 10

VOLUME RISK IS NOT COVERED BY TRADITIONAL RISK MANAGEMENT INSTRUMENTS

Risks

Pricing

P&CInterest

Rates, FX

Operational

Volumetric

Credit

Traditional Risk Management

• Traditional risk management instruments include insurance, swaps, futures, options, rules, guidelines, margining, legal analysis, and control systems

Weather Risk Management

• Volatile weather means variable costs and revenues• Weather is described using business-describing indices• The ability to hedge against the adverse effects of weather using the

described tools allows efficient management of cash flows

Value Creation

• Hedged cash flows improve the risk adjusted returns of a company• Extreme event hedging helps to secure against potentially extreme

financial effects• Volatility hedging helps to smooth cash flows over time

+

=


6-Nov-17 11

WHAT’S IMPORTANT – MEASURE THE WEATHER

Place Period Peril Payout People

• Single station• Location basket

• Annual• Seasonal• Event covers• Multi-year

• Temperature• Precipitation• Wind speed• Sun hours• River flow• Combinations

• Binary• Proportional• Second variable

• Retail customers• Corporations• Institutions• Municipalities• Governments• Organizations


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EXAMPLE: GASTRONOMY

DemandWhen do you order pizza? What is good weather for pizza delivery guys?

Weather allowing for lowest cost of ingredients? Come up with a weather marketing idea for a pizzeria?

Supply Marketing

Distribution/Operations


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EXAMPLE: AGRICULTURE

• Crops are sensitive to different weather perils throughout the planting, growing and harvesting season, such as rainfall, extreme heat and frost

• Total crop yield index (CYI) can be estimated by developing weather sensitivity factors for each crop and region, and multiplying the factors by weather indices (total days during the growing season in excess of 90ºF, planting season rainfall, etc.)

ConstindexFrostfactorFrostindexHeatfactorHeatindexRainfactorRainCYI +×+×+×= )__()__()__(


6-Nov-17 14

• Insolation (lack, volatility)• Heat• Panel degradation• Inverter failure• Construction• Operations and maintenance• Price risks, subsidies

RISKS IN GREEN ENERGY

• Rain fall, River flow• Construction• Price risks

• Wind speed (lack, excess, volatility)• Construction (off shore)• Technical risks• Operations and maintenance• Price risks, subsidies


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EXAMPLE: POWER GENERATION

2011 Wind Speed Variance from Average


6-Nov-17 16

EXAMPLE: POWER GENERATION

70

80

90

100

110

120

130

1975 1980 1985 1990 1995 2000 2005 2010 2015

Uncovered Production Covered Production Covered Volatility

Offshore

Onshore

Power Curve

0

5

10

15

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2.5kW turbine6kW turbine15kW turbine

Pow

er (k

W)

Wind speed (m/s)


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TWO ELEMENTS OF OUTPUT CONTRIBUTE TO REVENUE:REVENUE = VOLUME OF PRODUCTION X SELLING PRICE

Low Price + High

Production

High Price + High

Production

Low Price + Low

Production

High Price + Low

Production

Revenue Swap Strike

The combination of Price & Volume is key to Revenue Protection


6-Nov-17 18

PROXY REVENUE SWAP: CUSTOMER DELIVERS VARIABLE REVENUE TO ALLIANZ AND RECEIVES A CONSTANT REVENUE BY ALLIANZ

60

70

80

90

100

110

120

130

1975 1980 1985 1990 1995 2000 2005 2010 2015

% NormNormal

Normal or Average Revenue

Unhedged, volatile, modelled revenue delivered by customer

Resultant Constant Revenue paid to customer = Swap Strike

Rev

enue

Time


6-Nov-17 19

PROXY REVENUE SWAP

• Allianz delivers to client a certain cash flow stream

• Allianz assumes wind risk and power price risk

• Creating a “tolling agreement” style cash flow stream

• Clients desire a long tenor to match financing conditions

• Settlement annually or on another pre-agreed frequency

• Claims settlement quickly to enhance cash flow profile

• Terms are set to meet client’s objectives and budget

• Successfully executed in the United States to facilitate

– Wind farms yet to be constructed

– Wind farms that are in production and up for sale

• Provide favourable financing terms & higher project values

• Pipeline includes projects outside the US

Protect wind intermittency risk and power price risk


6-Nov-17 20

INFORMATION REQUIREMENTS & INDICATIVE SOLUTION

Allianz needs some informationfrom the generators

• Location: where is it, map?• Turbine information: What type,

manufacturer, how many, hub height?

• Phase: In planning, construction, operation, wind study, met mast data?

• Value and tenure: How will the electricity be sold and for how long, free market, PPA?

• Hedging goals: Lack of wind / sun hours / river flow, volatility, financing?

Wind data is critical to establish a proposal

• On-site wind data• Met stations• Modelled data

Establish insurance cover

• Allianz will use wind/insolation/rain data and turbine information to develop a theoretical generation

• For example, client wants to cover lack of wind/sun/rain at P90 level, i.e. a 10% client retention

• Allianz will pay in case the power generation index falls below the retention level in any year

• The protection may be executed for multiple years to match financing terms


6-Nov-17 21

BENEFITS OF ALLIANZ WEATHER INSURANCE

Tailored solutions address key volume risk to protect revenues and profits01

Credit enhancement resulting in improved financing terms03

Crucial element of comprehensive risk management02

Stakeholder management06

Fast, objective claims settlement04

Reduction of income volatility allows for improved budgeting05

Mark Twain (1835–1910)

“Everybody talks about the weather, but nobody does anything about it.”


6-Nov-17 23

WEATHER IS VERY UNPREDICTABLE


6-Nov-17 24

THANK YOU

allianz whether risk solutions [read-only] · 2020-02-15 · futures, options, rules, guidelines,...

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