Hydrology, Cryosphere & Earth Surface Editors' Highlights

How to Hedge the Risk of Reduced Snowpack for Hydropower

A new index insurance contract – a financial product innovation seeking to cope with climatic variability – could help hydropower operators to manage climate risks.

Source: Water Resources Research


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There has been an increasing number of papers in Water Resources Research on financial instruments to manage climatic variability. Hamilton et al. [2020] introduce a new index insurance instrument to help hydropower producers who depend on snow melt to cope with the risks of variable snowpack. This is a critical risk in snow-dominated regions such as California, where a significant fraction of the streamflow every year comes from a small number of large winter storms that do not always occur.

The authors use analysis of the relationship between snowpack and revenues to build a risk model. They examine the financial structure of a hydropower company and the possible attitudes of risk managers to debt and revenue risk. This can limit the extent to which a loss of revenue caused by drought reduces the long-term financial viability of a utility, improving outcomes for the public.

Citation: Hamilton, A. L., Characklis, G. W., & Reed, P. M. [2020]. Managing financial risk trade‐offs for hydropower generation using snowpack‐based index contracts. Water Resources Research, 56, e2020WR027212. https://doi.org/10.1029/2020WR027212

―Jim Hall, Editor, Water Resources Research

Text © 2020. The authors. CC BY-NC-ND 3.0
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