Power prices and Renewable production are difficult to project over months and years. New Power Quanto indices help coping with the capture price risk, factoring cannibalisation effect.
Renewable energy production is profoundly affected by the variation of weather conditions a well-known fact. However, with the increasing amount of renewable assets being built, renewables start to flood the market in parallel – and impact energy market prices. The more wind farms, the more energy gathered in case of stormy weather, the more prices get pushed down. Both facts create uncertainties in long-term revenue streams.
The inherent unpredictability of weather-dependent energy generation presents a unique set of challenges for companies dealing with renewable energy. Therefore, renewable energy producers, buyers, and sellers of Product Purchase Agreements (PPAs), asset holders, and investors all face the difficulties of predicting the volume of power production, and at the same time, its impact on and revenue from market prices. Therefore, the price captured by selling renewable assets generation on the spot markets is itself very volatile.
A possible remedy: Power Quanto Indices, as a means for market participants to hedge against capture price risk (also known as Quality Factor risk). To create these indices, the European Power Exchange EPEX SPOT and Speedwell Climate Limited, a provider of weather-related data, came together in June 2022 to introduce a pioneering concept: weather-based power indices. This initiative was designed to address the natural uncertainties associated with renewable energy production – particularly those driven by variable weather conditions – and its impact on the spot prices.
The collaboration began with the launch of three distinct indices in Great Britain, starting with the Wind Index Suite. The geographical and technological scope was gradually expended and currently Wind Quanto indices are available for most of the European market areas (GB, Central-Western Europe and Nordics). Solar Quanto indices are available in four markets areas (Belgium, Germany, Great Britain, and the Netherlands), and more are to be released soon.
Renewable Quanto Indices serve several purposes:
- For renewable energy producers, as a mechanism to enhance revenue stability in the medium term.
- Meanwhile, buyers and sellers of PPAs will be able to make more informed decisions, secure long-term financing for their projects, and navigate market volatility with greater confidence.
- As for asset holders and investors, they can create more predictable financial models and support the ongoing development of renewable energy projects.
In essence, by using these indices as underlying, market participants can enter into risk-transfer contracts to hedge against potential revenue losses due to weather-related fluctuations. Quanto Indices aim to combine renewable energy generation, encompassing wind and solar power sources, with the dynamics of spot price fluctuations over varying time periods (months, quarters, or seasons). The result is an assessment of how weather-related variables impact energy markets and influence the revenues of market participants.
The market starts to pick up the tool as well. In October 2023, Statkraft, Europe’s largest renewable power generator, agreed a Quality Factor Index Swap relating to UK power, and the trade was transferred by Munich Re, a leading global provider of weather risk covers. The transaction represents a first-of-its-kind financial swap in the energy trading industry, using EPEX SPOT and Speedwell Climate new Quality Factor.
By reducing uncertainty and providing a tool to manage associated financial risk, Power Quanto Indices actively contribute to the growth and development of renewable energy projects. In an era where sustainability and clean energy are paramount, these indices offer: a solution to secure investments, to ensure more stable and predictable revenue streams, and ultimately to foster the expansion of renewable energy in the energy market.
