Nephila & Allianz in proxy revenue swap for Escalade wind farm in Texas

Nephila Capital, the largest insurance and reinsurance linked fund manager and global insurer Allianz have collaborated again to provide a proxy revenue swap to help reduce financing risk for those funding the 336 MW Escalade wind farm project in Texas.

Through its specialist climate and weather focused underwriting, risk transfer and investment unit Nephila Climate, the ILS fund manager will have taken on weather volatility risk as its part of the arrangement, sourcing weather risks for its dedicated and mixed ILS and catastrophe reinsurance investment strategies.

Nephila Capital has been involved in the weather and climate risk transfer market for well over a decade, providing reinsurance capacity to support and assume catastrophe and weather related exposures, or through more complex financial structures that allow for weather risk to be hedged, reducing the volatility associated with supply for renewable energy projects such as wind farms.

These specific transactions, dubbed proxy revenue or generation swaps, sometimes long-term off-take transactions and also the newer Proxy Generation Power Purchase Agreements (pgPPA), afford greater certainty to investors in, operators of and ultimately to the planning and construction of renewable energy projects by hedging out weather related supply and volume risk.

The latest transaction to come to light involves the Escalade wind farm, located in Knox County, around 300kms west of the Dallas-Fort Worth metropolitan area.

Investment fund the Taaleri SolarWind II fund has, alongside AIP, Ilmarinen, and Akuo Energy, acquired 93% of the equity in the Escalade wind farm, while project developer Taaleri Energia retains a minority stake.

With construction scheduled to begin in Q2 2020 and with the wind farm expected to reach operational status in Q4 2021, the financing team have turned to Nephila and Allianz to provide greater certainty and to reduce risk.

To achieve a reduction in risk for the investors, the majority of the power produced by the Escalade wind farm is set to be contracted under a 10-year Proxy Revenue Swap agreement.

The agreement is with Allianz Global Corporate & Specialty SE’s Capital Solutions unit, working alongside ILS investment manager unit Nephila Climate.

Risk analytics to support the transaction over its term are provided by specialist firm REsurety Inc., who will typically also serve as the calculation agent for the life of the contract.

The proxy revenue swap and related products are one of a suite of risk transfer offerings that Nephila offers to investors in, as well as buyers and sellers of renewable energy, to manage risks associated with weather-driven renewable energy projects and energy production.

Renewable energy hedging products such as these help those with financial exposure to a project mitigate the shape, price and volume risk associated with them, ultimately reducing uncertainty for investors and project owners or operators.

For Nephila Capital, as well as its ILS and reinsurance investment fund allocators, the underlying weather-related risk assumed through its support for these transactions augment its weather-risk linked investment fund strategies, adding new risk over longer terms.

These wind farm risk transfer transactions combine an innovative mix of financing and reinsurance hedging, with the result being greater certainty for the burgeoning renewable energy sector’s investments. The same financial technology has been successfully applied in the solar power space as well.