Comparing Alternatives for Managing Hydrometeorological Financial Risk for Hydropower Suppliers

Droughts and heatwaves create significant financial risk for hydropower suppliers, as drought reduces generation and revenues, while heatwaves increase demand and often costs. While many suppliers manage their risk independently, some are government-supported. This leads to an important question: How do the costs of a government-supported risk management strategy compare with a self-supported strategy? This research provides a framework to address this question, applying it to a hydropower supplier in the United States with access to a government-supported line of credit, the Bonneville Power Administration (BPA). The analysis includes models to stochastically simulate weather, electricity prices, and the BPA’s operations. Results suggest that government support effectively mitigates the BPA’s hydrometeorological financial risk but at costs to taxpayers that can exceed $1 billion over 20 years. Replacing the line of credit with index insurance comparably manages financial risk at lower costs limited to the BPA and its customers. This framework for comparing government- and self-supported approaches may prove useful to hydropower suppliers and governments, as they decide how to manage hydrometeorological financial risk, especially in lower-income countries with limited public funds.