New risk transfer solution to protect energy provider against drought-related losses
Brazil, the world's third largest producer of hydropower, is slowly recovering from the worst drought it has suffered in 40 years. Since 2013, hydropower generation, which makes up almost 70 per cent of the country's energy supply, has decreased drastically due to the lack of water in major reservoirs. As a result, energy prices have soared and large energy buyers have suffered severe losses.
Swiss Re Corporate Solutions is the first insurance company in Brazil to issue a weather-indexed parametric policy which offers relief in the event of another similar crisis. This solution enables energy providers to limit their exposure to extreme weather events, such as scarce rainfall and floods.
Product helps limit volatility of energy spot-market price
Rodrigo Violaro, the Swiss Re Corporate Solutions director responsible for weather-index products in Brazil, explains: “The severe drought in 2014 drastically reduced the water flow in our main rivers, and Brazilian hydroelectric plants suffered electricity production losses as a result. To compensate for the production shortfall, thermoelectric plants had to be brought on line. As these plants are more expensive to operate, energy prices soared.”
Big energy companies are exposed to significant losses from such energy price volatility. As a rule, they contractually agree to supply energy for pre-set amounts. While the sale prices are set in advance, the actual purchases take place on the spot market. Variations in the price of energy can have an impact on their cash flows. The new insurance product will help them to limit their vulnerability to energy price fluctuations. Index based on river water flow
The customized solution offered to the energy provider is based on the Affluent Natural Energy (ANE) index, which measures the energy obtained from a river’s natural flow. The index is estimated daily by the National System Operator (NSO), an independent body responsible for coordinating and controlling electricity generation and transmission facilities in Brazil. “If the ANE is below 90% of the long-term average, Swiss Re Corporate Solutions pays financial compensation,” Violaro explains.
Great potential for energy and agricultural sectors in Brazil
While Swiss Re Corporate Solutions is the first insurer to offer such weather-indexed cover in Brazil, similar policies are already widely used in other countries in Europe, Asia and North America. “This type of product enables us to focus on the specific needs of companies in the energy and agribusiness sectors, which are fundamental for the Brazilian economy. We expect that here in Brazil the product will repeat the success it has enjoyed around the world and that it will become an important part of our portfolio”, says Luciano Calheiros, sales director of Swiss Re Corporate Solutions in Brazil.
According to climatologists, Brazil will continue to remain vulnerable to droughts. The traditional rainy season is becoming irregular, with periods of several days with no rainfall. To build up its resilience, the country needs to further diversify its energy supply and invest more into other renewable energy sources, such as wind power. At the same time, the energy sector should actively look for risk transfer solutions that enable it to adapt to the consequences of extreme weather events and climate change in general.
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