Protecting a state-owned utility company against the lack of rainfall and oil price spikes

Hydropower causes very few CO₂ emissions in production; but as with other renewable energy sources, its actual output depends on the prevailing weather conditions. Uruguay is fortunate to have four river basins within its borders, two of which feed its hydroelectric plants. Hydropower can supply up to 90% of the country‘s electricity demand in a humid year.

However, Uruguay’s generation of hydroelectric power is being progressively impacted by climate change. In a year of drought, the country relies upon costly alternatives such as imported crude oil, which also adversely impacts the country’s commitment to the United Nation’s Sustainable Development Goals.

To reduce the impact of drought conditions and the fluctuation in commodity prices, Uruguay’s state-owned hydroelectric power generation company (Administración Nacional de Usinas y Transmisiones Eléctricas) entered into a USD 450 million parametric weather coverage agreement with the World Bank Treasury in 2014. Swiss Re acted as the primary risk taker.

Under the terms of the agreement, a payout is triggered when water levels fall to a pre-determined point. The final amount of the payout depends on drought severity (i.e., via rainfall data) and the six-month daily average of the price of crude oil. The payout is then used to purchase oil to make up for the hydroelectric shortfall.