Weather risks in Brazil: An interview with Charlie Richardson of GCube Insurance Services

Brazil has experienced severe drought this year, the worst in 80 years. This in turn has had a significant impact on the country's energy sector, given that hydropower constitutes about 70 percent of the country’s energy resources. Brazilian energy ministers have been forced to think seriously about the country’s future strategy for ensuring sufficient energy production, particularly with regard to predictions of similar droughts for the rest of this year and into 2016. GCube, a leading underwriter for renewable energy initiatives has now launched a Weather Risk hedging product for hydropower and wind projects, available globally.   REM talked to Charlie Richardson to discuss the energy security concerns in Brazil and the available options for overcoming the problem.  
Weather risks in Brazil: An interview with Charlie Richardson of GCube Insurance Services

Can you tell me a bit more about GCube and what it does?

GCube is an underwriting agency that specializes in renewable energy and is an insurance carrier for renewable energy risk. We’ve been operating for 25 years and focus primarily on wind, solar and hydro power. The company is based in London and the U.S. but conducts business across the globe. We typically provide insurance contracts covering physical damage and loss of revenue for the transport, construction and operations phases of projects. However, we’ve now launched a new Weather Risk Transfer product which provides wider coverage for clients.

Just how bad has the Brazilian drought been and what has been the effect on hydropower?

This is a bit difficult since information coming out of Brazil can be limited, but overall I would say the water levels are generally okay. Having said this, in the northern region, the water level has dropped by 2.5 percentage points in the first half of September alone, which is quite a large fall. Some of these projects are in remote areas and in such a situation, you tend to lose energy quality the more you transport power through extensive transmission lines. Therefore you either have to have a huge amount of generation capacity  within the region or you have to import it; neither option is ideal. This isn’t the first time there has been a conversation on weather risk in South America with regard to its impact on energy infrastructure and the El Nino phenomenon has tended to exacerbate the problem this year, increasing uncertainty on the grid, the spot market power price and the need for grids to be stable in their supply. 

I’ve read elsewhere this has prompted the country to turn to solar power instead. How are plans to introduce that going?

We tend to see projects when they are about 12-18 months from financial close. Solar takes a shorter time to develop and we’ve seen a few projects out there but not many yet. This probably means that they are in the initial stages of planning and development.

But Brazilian solar is still very much in its infancy compared to the highly-developed wind sector. Furthermore, without energy storage, solar can be much less effective as a power source since it doesn’t always provide energy at the times it needs to be used – i.e. in the evenings.

It’s for this reason that wind power often makes much more sense. Brazil has experienced problems with wind energy in the past; the transmission and distribution networks weren't fully complete when the wind infrastructure was built, which meant that some of the wind power generated was just going straight into the ground. But those T&D networks are now much more developed  and contract structures have changed to lower this technical risk.

How do you see Brazil’s energy policy progressing as these droughts get worse? 

The long-term imperative is to diversify the energy network but that is going to take some time. In the short-term, Brazil is going to have to have other alternatives in place, such as imports. That’s also where our weather risk product comes in.

Can you just explain what a weather risk hedging product is?

A simple way of looking at it is this: insurance policies work on indemnity, which makes good on losses sustained. By contrast, the Weather Risk Transfer (WRT) product is known as a ‘financial hedge’ providing payment based on pre-determined amounts, not necessarily on the pure financial loss of the buyer. A large level company can afford some amount of volatility but only up to a certain point. The Weather Risk Transfer product empowers a utility, government, investor or other interested company to transfer their revenue volatility on to a third party in order to protect against huge shocks or spikes in their revenue. With regard to Brazilian hydro, if the water level drops below a certain level, the power stations are going to suffer a serious loss of revenue. That volatility can be transferred on to a WRT product. Those same power stations may be obligated to purchase spot market power in order to meet demand and the volatility of that risk can also be transferred to a WRT product, as long as the spot market price changes occur at a time when there is weather volatility that is considered within the WRT contract.

Can you tell me a bit more about how investors manage financial instability in these circumstances?

A lot of investors want to find a position with as close a guarantee as possible, which means it’s a big sell for our product in order to help guarantee a return on their investment. These weather risks are normally retained by the investor but the WRT product allows businesses to protect themselves against volatility, to give a greater amount of certainty and to smooth their revenue steam, thus allowing them to further invest in other projects. . Brazil hasn’t yet got a huge water problem and the fact that there are projects spread out all over the country means that there is a certain amount of risk mitigation. However, the WRT product gives governments, energy companies and investors an extra level of certainty.

How do you see the financial situation developing with time?

The WRT product is based on volatility and not everyone is prepared to pay to hedge against that volatility, but we all know that weather patterns, increasingly, are changing and this enhances the risk for parties involved in renewable energy. Additionally, the more companies invest in WRT products, the further the cost of those products will reduce. The more they transfer risk to third parties, the more they will be able to invest money in projects and so on. So weather risk products should help to drive renewable energy deployment forward if people can get their heads round the product, understand it and begin to invest in it.

GCube has been a leading provider of renewable energy insurance services for over 20 years. The company offers comprehensive property and liability coverage for utility-scale projects around the globe. Its policies have become the gold standard for comprehensive transit, construction and operational all risks coverage for a renewable energy project’s life cycle, from development through to commercial operations.

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