Statkraft has agreed an energy trade, with Munich Re that represents a first-of-its-kind financial swap in the energy trading industry, using a new index.
The price received for renewable power can be impacted by many factors intrinsic to the intermittent and uncertain nature of renewables, such as wind speed, deviation from what is expected at a particular time of year, or short-term variations in a forecast.
More wind generation tends to reduce prices and a lack of wind will have the opposite effect which means the achieved price for energy generated from wind is usually lower than the baseload price.
The ratio between the two is known as the Quality Factor (sometimes also called Capture Rate), which can be very volatile.
One way to protect against this is to trade baseload power alongside a Quality Factor financial swap.
This swap fixes the ratio of the achieved price actually realised, from selling renewable power versus baseload at the moment the offtake price is fixed, thereby guaranteeing revenues.
The Quality Factor transaction uses an index jointly produced by EPEX SPOT, a spot exchange for European power, and Speedwell Climate, a provider of benchmarks and weather data for index-based climate-risk transfer contracts.
The index is based on an hourly wind volume series from Speedwell Climate, which models wind generation from onshore and offshore sources across the whole of the UK (other countries and regions are also available), and EPEX SPOT’s hourly day-ahead auction reference prices.
These are combined to generate a single settlement value for a defined time period.
An over-the-counter swap can then be traded settling against the index, with varying degrees of “notional” defining the payoff.
Payoffs are usually capped at the highest historic payoff, to reduce the potential credit exposure.
Those who potentially face Quality Factor risks include holders of PPAs and owners of wind farms.
Matthew Hunt, Head of Statkraft’s UK Power Desk, said: “If you’re trading power these days, you need to be trading Quality Factor swaps at the same time, especially if you have renewable generation on your book.
“With the market becoming increasingly complex, these risks are not going away.
“This is a step towards creating a liquid market in Quality Factor, and we anticipate being on both the buy and sell side of Quality Factor in increasing volumes.”