Pricing the risk due to weather conditions in small variable renewable energy projects

Stephania Mosquera-López and Jorge Uribe

Applied Energy, 2022, vol. 322, issue C, No S0306261922008029

Abstract: We propose a methodology to price an insurance contract designed to hedge the volumetric risk associated with weather conditions. Our methodology is based on conditional quantile regressions and adapts Value at Risk (VaR) and Expected Shortfall statistics from the literature on financial econometrics. In our empirical application, we use actual daily meteorological and radiation data for 40 European cities in 13 countries, from April 1, 2011, to December 31, 2021, and calculate the value of the annual insurance premium under reasonable assumptions on the technology of the solar panels and expected energy demand. We consider variables such as temperature, wind speed, and precipitation in our calculations. Our results for the different cities in our sample show that due to the nonlinear impact of weather (mainly temperature and precipitation) on the expected generation losses, it is appropriate to use quantile regressions to calculate the VaR of radiation, conditional on weather factors. Our insurance premium calculations also present a high degree of variation across European, which indicates that risk-diversification opportunities of catastrophic risk due to weather conditions faced by insurance companies exist. This variation is explained by different weather conditions, model adjustment, and the average price of electricity.

Keywords: Insurance pricing; Weather risk; Green finance; Climate finance; Transition risk; Energy transition (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0306261922008029
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:appene:v:322:y:2022:i:c:s0306261922008029

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/bibliographic
http://www.elsevier. ... 405891/bibliographic

DOI: 10.1016/j.apenergy.2022.119476

Access Statistics for this article

Applied Energy is currently edited by J. Yan

More articles in Applied Energy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().