LAUSR

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 state-of-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.