Hydropower insurance for Uruguay
Hydropower causes very few CO2 emissions in production; but as with other renewable energy sources, its actual output depends on the prevailing weather conditions. Uruguay generates a substantial amount of energy through hydroelectric plants that largely rely on rainfall. The risk of lower-than-usual rainfall has become an increasing burden to the Uruguayan government: For instance, in 2012 hydropower production slumped because of a prolonged drought, making it necessary for the government to buy costly electricity produced from fossil fuels as a substitute. Not only was this bad for the climate, it also pushed the government into a budget deficit.
In 2014, we assumed a portion of risk in a USD 450 million weather coverage bought by the Uruguayan government with the assistance of the World Bank Treasury, which helps to reduce this financial risk. In future, if the government needs to import electricity because of drought and a subsequent fall in energy generation, it will automatically receive compensation. The payout amount will be determined by rainfall data and oil prices, thus covering the double risk of drought conditions and an increase in energy prices.
By removing a major source of budget uncertainty, this landmark transaction will support continued investment in climate-friendly hydropower generation.