Although managing weather risk is relatively new in many geographies, but the concept is spreading fast
 Energy production — especially renewable energy production — is highly weather sensitive. Since renewable energy business have high financial leverages, the business has significant volumetric risk to weather parameters. This impacts their energy generation potential and hence their revenues.
Weather risk management for renewable energy businessesWeather risk management is essentially about proactively managing these risk via financial risk management products designed to cover against adverse financial impact of weather anomalies. These are typically designed in the form of an index-based weather cover, which is a type of insurance that is triggered when the index exceeds a pre-defined value. “The index can be a temperature threshold, rainfall levels, sunshine duration, wind speed, or any other weather variable or combination of variables that represent the weather risk the business is exposed to,” says Gabriel Gross, President, Meteo Protect. “The cover is designed to compensate exactly or partially the losses incurred through adverse weather conditions. “With respect to wind energy, average wind speed variations are the main factor influencing production. Variations in availability of the renewable energy resource account for majority of the overall production risks (can be as high as 90 per cent of overall production risk) for a 20 per cent financial impact in certain regions.”
Reducing cash-flow volatilityThere are multiple options available to reduce the cash flow volatility in RE businesses like financial derivatives, exchange traded instruments or insurance contracts that protect against adverse outcome of weather parameters.
“The exact nature of contracts depends upon the regulatory framework in a particular geography,” says Mr Gross. “The compensation may be fixed or progressive if the losses caused by the weather increase with the index value. As with any index-based insurance, it is when a pre-defined index value is exceeded that the loss, in traditional insurance terms, occurs.”
The index value is the sole trigger for compensation. No claim adjustment process or additional administrative procedures are required.
Indian and weather risk managementIndia is a high-growth economy with an impressive track record of promoting renewable energy business, especially wind energy. India is set to make rapid strides in solar as well. While this is commendable efforts to reduce dependence on fossil fuels, this growing share of renewable also means growing climate dependency in coming years.
He also adds, “As renewable companies gain in size, there is growing awareness in India of the need to actively manage the financial consequences of climate variability.”
In India, lending culture has traditionally been collateral based and same applies to renewable energy sector. “For large investments to flow in the sector, there is need to have greater attention to cash flows in the sector and risk standards need to develop to a higher level of sophistication,” explains Mukul Kumar, Founder, Cognivant Consulting. “On the other hand, borrowers will need to strive to attain higher credit quality so that investment can flow into the sector at competitive costs of finance.”
It is well-known fact that renewable energy is expected to add new capacity over the next 5 years at a pace which is significantly higher than what we have seen over the last 5 years. According to Mr Kumar, “For a prudent estimate of addition of 30-40 GW over next 4-5 years, we need ` 3 lakh crore of investment out of which ` 2 lakh crore will have to be funded via debt. This will require that access to debt finance becomes more broad based and goes beyond traditional form bank finance of a lender locking in for an extended period into a specific project.”
For a borrower, accessing financing based on risk reduction measures implemented during operations phase also becomes more cost efficient. “This is the trend the world over,” opines Mr Kumar. “An active refinance market for operational projects with reduced risk profile are the way to accomplish the two objectives – greater access to finance and at competitive costs. For a very dynamic renewable sector, there is also a need to make bond market accessible by renewable energy projects. This would require bridging the gap between low risk profile of institutional investors and relatively high credit-risk profile of renewable energy project.”
As the quantum of lending to the renewable sector increases many folks in coming years, the developers and lenders alike will look for better quality of cash flows and hence adoption of risk mitigation measures again externalities such as weather anomalies becomes imperative for healthy growth of the sector.

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Although managing weather risk is relatively new in many geographies, but the concept is spreading fast
 Energy production — especially renewable energy production — is highly weather sensitive. Since renewable energy business have high financial leverages, the business has significant volumetric risk to weather parameters. This impacts their energy generation potential and hence their revenues.
Weather risk management for renewable energy businessesWeather risk management is essentially about proactively managing these risk via financial risk management products designed to cover against adverse financial impact of weather anomalies. These are typically designed in the form of an index-based weather cover, which is a type of insurance that is triggered when the index exceeds a pre-defined value. “The index can be a temperature threshold, rainfall levels, sunshine duration, wind speed, or any other weather variable or combination of variables that represent the weather risk the business is exposed to,” says Gabriel Gross, President, Meteo Protect. “The cover is designed to compensate exactly or partially the losses incurred through adverse weather conditions. “With respect to wind energy, average wind speed variations are the main factor influencing production. Variations in availability of the renewable energy resource account for majority of the overall production risks (can be as high as 90 per cent of overall production risk) for a 20 per cent financial impact in certain regions.”
Reducing cash-flow volatilityThere are multiple options available to reduce the cash flow volatility in RE businesses like financial derivatives, exchange traded instruments or insurance contracts that protect against adverse outcome of weather parameters.
“The exact nature of contracts depends upon the regulatory framework in a particular geography,” says Mr Gross. “The compensation may be fixed or progressive if the losses caused by the weather increase with the index value. As with any index-based insurance, it is when a pre-defined index value is exceeded that the loss, in traditional insurance terms, occurs.”
The index value is the sole trigger for compensation. No claim adjustment process or additional administrative procedures are required.
Indian and weather risk managementIndia is a high-growth economy with an impressive track record of promoting renewable energy business, especially wind energy. India is set to make rapid strides in solar as well. While this is commendable efforts to reduce dependence on fossil fuels, this growing share of renewable also means growing climate dependency in coming years.
He also adds, “As renewable companies gain in size, there is growing awareness in India of the need to actively manage the financial consequences of climate variability.”
In India, lending culture has traditionally been collateral based and same applies to renewable energy sector. “For large investments to flow in the sector, there is need to have greater attention to cash flows in the sector and risk standards need to develop to a higher level of sophistication,” explains Mukul Kumar, Founder, Cognivant Consulting. “On the other hand, borrowers will need to strive to attain higher credit quality so that investment can flow into the sector at competitive costs of finance.”
It is well-known fact that renewable energy is expected to add new capacity over the next 5 years at a pace which is significantly higher than what we have seen over the last 5 years. According to Mr Kumar, “For a prudent estimate of addition of 30-40 GW over next 4-5 years, we need ` 3 lakh crore of investment out of which ` 2 lakh crore will have to be funded via debt. This will require that access to debt finance becomes more broad based and goes beyond traditional form bank finance of a lender locking in for an extended period into a specific project.”
For a borrower, accessing financing based on risk reduction measures implemented during operations phase also becomes more cost efficient. “This is the trend the world over,” opines Mr Kumar. “An active refinance market for operational projects with reduced risk profile are the way to accomplish the two objectives – greater access to finance and at competitive costs. For a very dynamic renewable sector, there is also a need to make bond market accessible by renewable energy projects. This would require bridging the gap between low risk profile of institutional investors and relatively high credit-risk profile of renewable energy project.”
As the quantum of lending to the renewable sector increases many folks in coming years, the developers and lenders alike will look for better quality of cash flows and hence adoption of risk mitigation measures again externalities such as weather anomalies becomes imperative for healthy growth of the sector.

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