Global risk pooling mitigates financial risk from drought in hydropower-dependent countries.
other · Level V
Where this comes from
- Record sourced from PubMed, PMID 41545372.
- Also identified by DOI 10.1038/s41467-025-67082-z and PMC identifier 12820157.
- Licence recorded as CC BY.
- The licence permits redistribution, so the abstract is shown in full and the full text is available from the publisher.
Abstract
More than 50 countries rely on hydropower for over 25% of their electricity generation, making them vulnerable to drought and resulting revenue losses. Governments can offset financial losses for publicly-owned hydropower generators, but this can create fiscal pressures and lead to negative consequences, such as lower bond ratings. Index-based financial instruments, used to manage weather-related risk, offer an alternative, though data collection and index design are challenging. Using remotely sensed hydrometeorological data, we develop index insurance contracts to manage drought-related financial risk for hydropower-dependent countries. Low correlations in drought across these countries allow cost reductions when risks are pooled. Pooling the contracts yields average savings of 54% compared to individual risk management via reserves. These findings indicate that pooled index insurance can strengthen financial resilience in countries dependent on hydropower and support governments in mitigating drought-related economic risks.