Wind derivatives for managing risk in the wind renewable energy sector

Abstract

This dissertation presents a comprehensive exploration of wind energy fundamentals and their integration with risk management, focusing on the pivotal role of wind derivatives in mitigating wind-related risks. Beginning with an elucidation of the foundational principles of wind energy, we delve into the intricate world of risk management in the wind energy sector, recognizing its unique challenges and complexities. We subsequently conduct an in-depth examination of wind derivatives, detailing their nature, historical evolution, diverse applications, and valuation methods. A practical simulation centered on the Panachaiko wind farm in Greece illustrates the application of wind derivatives, particularly in managing revenue fluctuations resulting from wind variability. Throughout this journey, the significance of wind energy in the global transition towards clean and sustainable energy sources is highlighted, emphasizing its potential to reduce greenhouse gas emissions and combat climate change. Traditional risk mitigation strategies, including insurance, are contrasted with the proactive and tailored approach offered by financial derivatives, particularly wind derivatives. These instruments are showcased as powerful tools for addressing the unique challenges of the wind energy industry, owing to their adaptability and ability to activate based on predefined conditions. The simulation results underscore the effectiveness of Asian options as risk management tools in the wind energy sector, especially under minimal wind speed conditions. As the world continues to embrace renewable energy sources, wind derivatives are poised to become indispensable in ensuring the sustainability and profitability of wind energy projects. Nevertheless, their adoption requires a nuanced understanding of weather patterns, financial markets, and regulatory frameworks. This dissertation provides a solid foundation for comprehending wind energy fundamentals, risk management strategies, and the practical utilization of wind derivatives. It sets the stage for future research into the complexities and nuances of wind derivatives, their applicability in diverse geographical regions and wind farm setups, and their long-term effectiveness in managing wind-related risks. In conclusion, as the wind energy sector continues to grow, the integration of wind derivatives into risk management practices is essential for enhancing project profitability, stability, and the broader goal of mitigating climate change through renewable energy sources.