How to Hedge the Risk of Reduced Snowpack for Hydropower

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.

―Jim Hall, Editor, Water Resources Research

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

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