Hedging Volumetric Risks of Solar Power Producers Using Weather Derivative Smart Contracts on a Blockchain Marketplace

Abstract

The vulnerability of solar power producers to sunshine fluctuations exposes them to the volumetric risk that future electricity generation may deviate from predicted generation. Weather derivatives have recently emerged as a tool for hedging the volumetric risks of these power producers. However, the stateof-the-art instruments have several shortcomings, contributing to their limited application in the industry. Therefore, novel solar radiation-based weather derivative smart contract arrangements on a blockchain marketplace are proposed to address some of the main limitations of traditional instruments. In this regard, the cash flow of solar generators is modelled to assess the weather elements causing its stochasticity. Using this information, novel smart contract arrangements on a blockchain marketplace with solar radiation days as the underlying weather index are developed and analytically valued. Thereafter, a suite of novel smart contract autonomous mechanisms compelling contracting parties to behave rationally and maintain an enduring arrangement is presented. Finally, a trading strategy based on the developed smart contract arrangements is proposed to minimize the power producers' volatility risk. Results emanating from notional simulations indicate that the proposed approach could be more suitable for hedging the volumetric risks of solar power producers than traditional instruments.

A diversified portfolio of tokenised revenue streams can provide hedging opportunities for renewable electricity generators

“…Results are percentages, representing the portion of each generator's investments in their peers' RevToks. Similarly, Figure 10 shows which RevToks are owned by which generator, as in matrix o in Equation (19). That is, each row shows how a generator's RevToks are distributed.…”

“…Matrix p is then defined as the counterpart of the o matrix in Equation (19). Each column vector represents the portfolio of a single generator, as in Equation (21)…”

“…In response to this rapidly-changing environment, Decentralised Finance (DEFI)-based solutions have been suggested as an alternative means of hedging against these risks, such as examples in Ref. [18,19]. DEFI is an application of blockchain principles that leverages the technology for granular financial operations, such as loans, derivatives, exchanges, insurance and financial escrow.…”

Blockchain technology in the renewable energy sector: A co-word analysis of academic discourse

“…Blockchain's application in automated control of energy and storage flows through smart contracts is equally important. These contracts automate complex transactions and operational processes, including the real-time balancing of supply and demand [ 36 , 99 ]. Finally, the secure recording of all business activities in the energy industry is a critical feature of blockchain.…”

Efficient Risk Management for Distributed Clean Energy: Principal Component based Weather Derivatives

“…This is due to issues such as emergency curtailment, which has seen a rapid increase both in the Kyushu region of Japan [11] and globally [12] in recent years, as well as changes in installed capacity, delayed information disclosure, and opaque measurement errors. In response to these challenges, we opt for a more commonplace and homogeneous observed data, i.e., solar radiation, as in recent related studies [13][14][15][16], as an alternative underlying asset.…”