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Mitigating wind exposure with zero-cost collar insurance

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  • Fernandes, Gláucia
  • Gomes, Leonardo
  • Vasconcelos, Gabriel
  • Brandão, Luiz

Abstract

Renewable energy generation worldwide has relied increasingly on wind farms where wind energy is transformed into electricity. On the other hand, electricity prices are uncertain and wind speeds are highly variable, which exposes the producer to risks. Typically wind power producers enter into long term fixed price contracts in order to hedge against energy price risk, but these contracts expose the wind farm to energy volume risk, as they require delivery of the full amount of energy contracted, even if energy production falls short due to low wind speeds. To mitigate this risk, wind producers can purchase insurance. This article proposes a zero-cost collar insurance and develop a stochastic model to determine the feasible range of wind strikes for both the wind farm and the insurer. The results indicate there is a set of possible strike combinations that meets the objectives of both parties.

Suggested Citation

  • Fernandes, Gláucia & Gomes, Leonardo & Vasconcelos, Gabriel & Brandão, Luiz, 2016. "Mitigating wind exposure with zero-cost collar insurance," Renewable Energy, Elsevier, vol. 99(C), pages 336-346.
  • Handle: RePEc:eee:renene:v:99:y:2016:i:c:p:336-346
    DOI: 10.1016/j.renene.2016.07.016
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    Cited by:

    1. Yu-Chung Tsao & Thuy-Linh Vu, 2023. "Electricity pricing, capacity, and predictive maintenance considering reliability," Annals of Operations Research, Springer, vol. 322(2), pages 991-1011, March.
    2. Lucy, Zachary & Kern, Jordan, 2021. "Analysis of fixed volume swaps for hedging financial risk at large-scale wind projects," Energy Economics, Elsevier, vol. 103(C).
    3. Adkins, Roger & Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Investment decisions with finite-lived collars," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 185-204.

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