TradeEdge-Insurance-like Product Protects Power Developers from Windless Days

When wind power developers began knocking on TradeEdgethe door of New York-based Galileo Weather Risk Management Advisors, the firm spotted a chance to help the industry sidestep its biggest hurdle to financial success: windless days.

By offering developers, power purchasers and financiers an insurance-like product that would cover a percentage of losses incurred by spotty wind production, Galileo believed it could soften the risk of wind variability and speed up clean energy development worldwide.

“There is a lot of financing going on in this sector, and people have been contacting us … about trying to develop products that would be meaningful for the industry and facilitate financing,” Galileo CEO Martin Malinow told SolveClimate News.

Galileo, which also has offices in London and Bermuda, formed in 2005 and sells weather risk management protection plans for traditional power, gas, wind, solar and hydropower in North America, Europe and Australia.

For wind clients, the idea was that Galileo would make payouts when wind speeds and energy output plummet to a specified level established by a contract. But as the firm began to shop its risk management plan around, it noticed that individual wind farms often lacked sufficient measurement tools for long-term wind speed forecasts, crucial information for its strategy to work across the board.

“We needed somebody that could give us a view of how the wind was blowing … and not rely on mechanical devices that could break down,” he said.

So Galileo tapped 3TIER, a renewable energy forecasting company in Seattle, to provide global weather modeling data for Galileo’s new WindLock product. Last month, the companies formally announced their first-of-its-kind financial instrument.

Enter 3TIER

3TIER takes the standard weather research and forecasting (WRF) model — a series of computer programs and data assimilation — and applies it specifically to wind speeds at the project site, Todd Stone, 3TIER’s communications director, told SolveClimate News.

WindLock uses 3TIER’s wind speed measurements to determine whether it would have to make payouts to a particular wind farm. The product manages “the uncertainty of wind-driven earnings,” Malinow said in a May 19 press release, “which will create greater capital market access and potentially a lower cost of capital for new projects or refinancings.” 

Stone said demand for its product is a sign that the industry has come of age.

“Modeling has been used for these purposes for ten years or so, and I think the fact that people are now willing to make significant financial bets on the data is an indication of how good the modeling has become; how accurate it has become; and how commonly accepted it is as a long-term reference for wind resources,” he said.

“It is both an indication of the maturity of modeling, as well as an indication of the maturity of the [wind] industry.”

Risk Management Key

Audun Botterud, an energy systems engineer at the Argonne National Laboratory in Illinois, said that the wind energy market has a need for a financial risk management tool, though he said he is not familiar with the WindLock product in particular.

“By paying a premium, you can reduce the overall risk,” he said. “That is something that the banks and lenders are going to appreciate very much, because the relatively high level of risk in investing in wind power has been one of the drawbacks or hurdles to getting more investments in that type of energy.”

He added: “At the general level, I think those types of products, if they’re priced correctly, would continue the expansion of wind power by hedging the risk and thereby making it easier” to invest in wind energy.

Mike Whitaker of Plano, Texas-based Unique Capital LLC, a capital advisor for renewable energy projects, said that a wind risk mitigation product could help some investors shave off the 12 to 18 months of on-site data collection typically carried out before a wind farm’s construction.

“Overall, I think there is a market for [the product] and a need for it, but it depends on the cost and the tenure,” he said.

“Those hedges, to be successful, would have to match the terms of the debt to satisfy debt investors and would have to satisfy the terms of the PPA [power purchase agreement] to satisfy equity investors.”

Short-Term Forecasting Matures

Short-term forecasting tools are also making advances in lowering the risks for wind farm developers and investors.

3TIER recently upgraded its wind prospecting tool to a 90-meter resolution, up from the 5-kilometer resolution of its earlier version. The web-based map allows users to read wind speeds and wind variability at any given location and to see how wind resources interact with small terrain features.

The tool currently only covers the continental United States but eventually will be expanded for global coverage, Stone said.

“It helps [developers] avoid investing too much time and energy and ultimately resources in locations that are not going to be good enough” in the earliest stages of project development, he said.

He noted that 3TIER offers similar prospecting tools and weather prediction modeling for the solar energy industry as well.

20% Wind by 2030?

At the Argonne laboratory, a short-term forecasting project has been successful in developing new statistical algorithms to improve the performance of next-hour and next-day wind forecasts, Botterud said.

The project began in 2008 with funding from the U.S. Department of Energy (DOE)’s Wind and Water Power Program. As project lead, Argonne brought on Portugal’s Institute for Systems and Computer Engineering of Porto plus the Midwest Independent System Operator and developer Horizon Wind Energy LLC.

Botterud said the team is expected to wrap up its final reports in the next few months.

He added that short-term forecasting could help the DOE reach its goal of producing 20 percent of U.S. power from wind alone by 2030.

In 2010, wind energy made up 2.3 percent of U.S. electricity, up from 1.8 percent in 2009, according to a year-end report by the American Wind Energy Association (AWEA). Total installed capacity increased by 15 percent to 40,181 megawatts last year.

“If you can say something about how much the wind is going to blow and how much wind power you would get for the next minute, hour or day, that contributes to operating the systems much more efficiently,” Botterud said.