A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities
Variable hydrometeorological conditions can impact electric utilities’ financial stability. Extreme temperatures often increase electricity demand, raising utility costs, while drought reduces hydropower generation and often reduces revenues, with financial impacts potentially exacerbated by spikes...
Saved in:
| Main Authors: | , , , , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
IOP Publishing
2025-01-01
|
| Series: | Environmental Research: Energy |
| Subjects: | |
| Online Access: | https://doi.org/10.1088/2753-3751/adf072 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1849245410137210880 |
|---|---|
| author | Yash Amonkar Corey Pahel-Short Amir Zeighami Yufei Su Jordan D Kern Gregory W Characklis |
| author_facet | Yash Amonkar Corey Pahel-Short Amir Zeighami Yufei Su Jordan D Kern Gregory W Characklis |
| author_sort | Yash Amonkar |
| collection | DOAJ |
| description | Variable hydrometeorological conditions can impact electric utilities’ financial stability. Extreme temperatures often increase electricity demand, raising utility costs, while drought reduces hydropower generation and often reduces revenues, with financial impacts potentially exacerbated by spikes in fuel prices, particularly natural gas. In this study, a model of the US. West Coast power system is combined with a financial risk model of a large California electric utility as it responds to variable hydrometeorology and market conditions, and is used to test the performance of a novel financial tool for managing risk. An insurance contract based on a composite index of measures related to streamflow, temperature, and natural gas prices is developed and its cost-effectiveness is compared against a portfolio of three currently available index contracts each based on a single index. The new composite index contract achieves an equivalent reduction in the utility’s net revenue variance as a portfolio of the three existing contract types for roughly half the cost with the cost reduction largely attributable to lower basis risk associated with the composite index contract. The utility’s financial risk and the effectiveness of the new contract are also explored under an alternative regulatory scenario involving a pollution tax intended to reduce air pollution damages and emissions. Overall, this case study represents a new approach to managing financial risk arising from hydrometeorological and market variability for vertically integrated utilities, the most common utility structure. |
| format | Article |
| id | doaj-art-dc839bedfc084f4d91a6a7706f9fb525 |
| institution | Kabale University |
| issn | 2753-3751 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | IOP Publishing |
| record_format | Article |
| series | Environmental Research: Energy |
| spelling | doaj-art-dc839bedfc084f4d91a6a7706f9fb5252025-08-20T03:58:49ZengIOP PublishingEnvironmental Research: Energy2753-37512025-01-012303500610.1088/2753-3751/adf072A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilitiesYash Amonkar0https://orcid.org/0000-0003-4866-6090Corey Pahel-Short1Amir Zeighami2Yufei Su3https://orcid.org/0000-0002-0133-4593Jordan D Kern4https://orcid.org/0000-0002-1999-0628Gregory W Characklis5https://orcid.org/0000-0001-9882-9068Institute for Risk Management & Insurance Innovation (IRMII), University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of America; Department of Environmental Sciences and Engineering, Gillings School of Global Public Health, University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of AmericaInstitute for Risk Management & Insurance Innovation (IRMII), University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of America; Department of Environmental Sciences and Engineering, Gillings School of Global Public Health, University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of AmericaDepartment of Forestry and Environmental Resources, North Carolina State University , Raleigh, NC, United States of AmericaS&P Global, Commodity Insights , Shanghai, People’s Republic of ChinaDepartment of Forestry and Environmental Resources, North Carolina State University , Raleigh, NC, United States of America; Department of Industrial and Systems Engineering, North Carolina State University , Raleigh, NC, United States of AmericaInstitute for Risk Management & Insurance Innovation (IRMII), University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of America; Department of Environmental Sciences and Engineering, Gillings School of Global Public Health, University of North Carolina at Chapel Hill , Chapel Hill, NC, United States of AmericaVariable hydrometeorological conditions can impact electric utilities’ financial stability. Extreme temperatures often increase electricity demand, raising utility costs, while drought reduces hydropower generation and often reduces revenues, with financial impacts potentially exacerbated by spikes in fuel prices, particularly natural gas. In this study, a model of the US. West Coast power system is combined with a financial risk model of a large California electric utility as it responds to variable hydrometeorology and market conditions, and is used to test the performance of a novel financial tool for managing risk. An insurance contract based on a composite index of measures related to streamflow, temperature, and natural gas prices is developed and its cost-effectiveness is compared against a portfolio of three currently available index contracts each based on a single index. The new composite index contract achieves an equivalent reduction in the utility’s net revenue variance as a portfolio of the three existing contract types for roughly half the cost with the cost reduction largely attributable to lower basis risk associated with the composite index contract. The utility’s financial risk and the effectiveness of the new contract are also explored under an alternative regulatory scenario involving a pollution tax intended to reduce air pollution damages and emissions. Overall, this case study represents a new approach to managing financial risk arising from hydrometeorological and market variability for vertically integrated utilities, the most common utility structure.https://doi.org/10.1088/2753-3751/adf072electric utilitiesindex insurancefinancial risk managementhydrometeorological variabilityenergy marketsCAISO |
| spellingShingle | Yash Amonkar Corey Pahel-Short Amir Zeighami Yufei Su Jordan D Kern Gregory W Characklis A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities Environmental Research: Energy electric utilities index insurance financial risk management hydrometeorological variability energy markets CAISO |
| title | A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| title_full | A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| title_fullStr | A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| title_full_unstemmed | A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| title_short | A composite index-based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| title_sort | composite index based insurance instrument for managing the financial risk of variable hydrometeorology for electric utilities |
| topic | electric utilities index insurance financial risk management hydrometeorological variability energy markets CAISO |
| url | https://doi.org/10.1088/2753-3751/adf072 |
| work_keys_str_mv | AT yashamonkar acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT coreypahelshort acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT amirzeighami acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT yufeisu acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT jordandkern acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT gregorywcharacklis acompositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT yashamonkar compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT coreypahelshort compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT amirzeighami compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT yufeisu compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT jordandkern compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities AT gregorywcharacklis compositeindexbasedinsuranceinstrumentformanagingthefinancialriskofvariablehydrometeorologyforelectricutilities |