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Derivatives

Spanish Industrial Group Considers Hedging Wind Exposure

Grupo Dragados and a group of creditors that are funding its ambitious EUR500 (USD580 million) million 1 GW wind farm development program are considering tapping the nascent wind derivative market to smooth out the earnings unpredictability caused by fluctuating wind speeds, according to DW sister publication Power Finance & Risk. If a deal is executed, it would likely mark the first time that a wind derivative has been embedded within a wind farm loan and also, given the large size of the Dragados' wind farm project, the biggest wind derivative contract ever executed. Although the factors upon which a decision will hinge could not be determined, simple economics is usually the guiding principle in such deals, according to a derivative structurer.

Market watchers said Madrid-based Dragados, one of Spain's largest industrial conglomerates, and its lead banks, Westdeutsche Landesbank, Barcelona-based La Caixa and Dexia Crédit Local, are talking to Entergy-Koch Trading about the feasibility and cost of acquiring a wind hedge. David Pethick, head of weather derivatives at EKT in London, and Fabrizio Donnini-Ferretti, head of Dexia' power group in Paris, declined to comment. Lorenzo Cooklin Diaz, director of communications at Dragados, did not return calls.

The monetary size of the wind derivative contract could not be ascertained, but it could well exceed EUR20 million given the size of the Dragados wind program. "A rough rule of thumb is that it costs EUR1 million to hedge 40 MW of wind generation exposure," noted the derivatives structurer. He added that EKT, probably the leading marketer of wind derivative contracts, has to date executed a handful of deals, all around the EUR1 million mark.

At a Herbert Smith-sponsored energy trading conference in London last week, Pethick told attendees that EKT is increasingly targeting its wind derivative marketing effort toward wind farm financiers, rather than wind farm developers, as these are the players who have most to gain from stripping out the risk of low wind speeds. "Wind risk can impact a wind farm's revenues by 25%. It's the largest single risk," he noted.

Dragados will use the proceeds of the USD500 million loan to fund the construction of wind farms around Castilla La Mancha, Leon and Madrid. Dragados' renewable energy arm Urbaenergia is developing the wind parks.

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