Software and technology giant Microsoft is leveraging the reinsurance market to help it access sources of renewable energy while bearing less risk, making its data centers which provide cloud services greener.
Reinsurers are attracted to renewable energy risks as they can often be considered a diversifying risk, versus the more typical catastrophe and severe weather risks they assume.
Microsoft has identified reinsurers appetite for risks associated with renewable energy, such as wind or solar power, as an opportunity enabling it to invest in these energy sources with lower risk.
By bringing on-board reinsurance capital to take on risks associated with pricing and production volume volatility, Microsoft has been able to purchase a long-term source of renewable energy from the Bloom Wind farm project in Kansas more affordably and with greater price certainty.
Speaking at a recent conference (reported by Data Center Frontier), Microsoft General Manager of Cloud Infrastructure Strategy Christian Belady explained, “There tends to be a significant (price) premium with renewable projects. There’s a lot of risk associated with that, and these are long-term contracts. How do you manage risk around pricing and production to mitigate that premium? We introduced a reinsurance market.”
Our sister site Artemis covered this specific transaction last year here, which saw Allianz Risk Transfer (ART) partner with ILS specialist manager Nephila Capital to commercialise and deliver a brand new wind farm volume hedging product.
Allianz Risk Transfer (ART) and Nephila Capital arranged the hedging instrument, which also features weather risk transfer tied to energy production volume and price.
It’s interesting to hear how Microsoft itself thought through the problems associated with the volatility associated with wind farm energy production and how it fixed its costs by reducing its risks, with the help of reinsurance capital and innovative risk transfer.
Belady explained that reinsurers are attracted to renewable energy risks as a they represent an exposure which is not correlated with other risks in their portfolio. By introducing risk transfer and reinsurance capital it reduces the volumetric risk for the renewable energy project itself, in terms of income certainty, as well as the energy buyer, in terms of price certainty.
The reinsurer receives the premium for taking on the exposure, agreeing to pay out for losses above a pre-defined trigger point.
“We’re hoping that this will enable others to do similar types of projects,” Belady said during the conference. “Cloud providers, because of the scale we’re working at, can introduce ways of doing things differently. That can change the industry and have huge benefits for everyone.”
Belady said at the time of the deal that the reinsurance arrangement would help companies adopt renewable energy more rapidly, thanks to the reduction in risk and increase in certainty.
Microsoft is looking to increase its renewable energy usage to 50% of its data center power needs within two years.
By working with innovative reinsurance capital providers, who understand the risks involved and mechanisms to bring greater certainty to buyers and sellers through hedging, its ambitions in renewable energy use are more reachable.
