Countries that depend on hydropower face growing financial risk as climate change increases the frequency and severity of droughts, according to a new study published in Nature Communications. The research finds that pooling drought insurance across countries could significantly reduce costs and improve financial resilience for hydropower-dependent power systems.
More than 50 countries rely heavily on hydropower for electricity generation. In many developing economies, hydropower utilities are publicly owned, meaning governments often absorb financial losses when drought reduces electricity production. These costs can strain national budgets and divert funds from other priorities.
The ‘Global risk pooling mitigates financial risk from drought in hydropower-dependent countries’ study proposes a shared insurance approach that spreads drought risk across countries. Because drought conditions rarely affect all regions at the same time, combining insurance contracts into a shared pool can lower overall risk exposure and reduce insurance premiums.
The research was led by the UNC Institute for Risk Management and Insurance Innovation and included Rosa Cuppari, PhD, a doctoral alumna from the UNC Gillings School of Global Public Health’s Department of Environmental Sciences and Engineering; Tamlin Pavelsky, PhD, Kenan Distinguished Professor in Earth, Marine and Environmental Sciences; and Gregory Characklis, PhD, W.R. Kenan Jr. Distinguished Professor in Environmental Sciences and Engineering.
The team focused on index-based insurance, which triggers payouts when predefined drought indicators reach specific thresholds. Unlike traditional insurance, index-based contracts rely on objective climate and hydrological data, allowing for faster payments and lower administrative costs.
To design these contracts, researchers used satellite data related to hydropower supply and electricity demand. Individual country contracts were then combined into international risk pools. According to the study, this approach could reduce the amount of cash reserves governments must hold to manage drought-related losses.
Researchers estimate that pooled insurance contracts could generate average savings of 62% compared to countries managing drought risk independently through reserve funds.
“Risk pools, including index insurance, have already provided payouts for countries to recover from natural disasters, including the devastating impacts of Hurricane Melissa in Jamaica recently,” Cuppari said. “Creating similar pools for renewables is a next step, supporting countries’ existing generation sources and their goals for a clean energy transition.”
The authors say pooled index insurance could strengthen financial stability for hydropower-dependent countries while helping protect national economies from climate-driven shocks.
Future research will examine expanding risk pools to include countries with large shares of solar and wind generation. The team also plans to assess how risk pooling could complement long-term strategies such as diversifying national electricity systems.
