Hydropower generators rely on stream flows to serve as “fuel,” which can lead to volatility in revenues that is financially disruptive. This vulnerability to hydrologic uncertainty, and the possibility of increased hydrologic variability in the future, suggests that hydropower producers need new tools for managing these financial risks. This study uses an integrated hydro-economic model of the Roanoke River Basin to characterize the financial risk faced by hydropower generators as a result of changes in water supply. Several index-based financial instruments are developed and evaluated using 100-year simulations of Kerr, Gaston and Roanoke Rapids Dam operations. Index basis risk, pricing, and contract design are all explored. Contracts built on average daily inflow are shown to be capable of reducing water supply risk at a range of levels, with even significant levels of risk (i.e. inflows under 75% of average) mitigated at a relatively low cost (under 3% of average revenues).
