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Limited coverage available for when the wind doesn't blow


A critical risk wind power generating companies face is a lack of wind, a risk where hedging products have been developed by capital markets, but have not been widely bought by companies, according to experts.

"The principal risks of owning a wind farm are whether the wind blows or not," said David Jones, London-based chief executive officer of Allianz Specialized Investments, a unit of Munich, Germany-based Allianz S.E. "Make sure that you assess the wind on a particular site accurately," he advised. "There is a lot of long-term wind data available, but you must have an accurate view of a site's potential," he said.

"One of the areas I do not think that insurers are well-geared up for at the moment is lack-of-wind cover and lack of wave or tide power," said Tom Sexton, London-based co-head of Marsh Ltd.'s renewable energy team for Europe, Middle East, Asia and Africa, a unit of New York-based brokerage Marsh Inc.

There are some weather-hedging products available, said Mr. Sexton. "There is a weather derivative market to cater for that (lack of wind or tide power) and there have been hybrid deals to combine lack-of-wind cover with derivative support," he said. "But I think that this is an area where the insurance market does not provide a suitable solution to--they could, but I am not convinced that they would," he added.

London-based Willis Group Holdings Ltd., offers such a product, said Jatin Sharma, global sales coordinator for renewable energy at Willis.

Power generation output from wind farms can be affected by too much or too little wind, he said. Willis offers a weather derivative product that can hedge against this loss of revenue because of inconsistencies in wind, he said. The product is based on an index and payments depend on how much the wind blows. "If you have a large wind park and need to hedge the returns, you can use this product to make up any shortfall," Mr. Sharma said. "If you have big lender requirements, it is worth looking at."

A lot of conceptual discussions have taken place, but the number of actual deals done is far less, said Mr. Sharma. "Similar products have been bought and have been done for loss of river flow for hydro projects, and heating and cooling degree days," he added.

But buyers question the value of such products when there are other ways to hedge against the weather.

"Currently, they are quite expensive and we are not looking to buy those," said Mr. Jones, whose company owns and operates three wind farms in Germany and is developing another site in Italy.

He added that by building a diversified portfolio, investors and operators can negate the need to buy hedging products. "Diversifying into other technologies and geographical markets creates greater diversity and a reduction in volatility," he said.