Weather Derivatives Grow as Risks Intensify
By Ivan Castano
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renewable electricity capacity

Popularity of Renewables

The U.N. has set ambitious climate targets, including decreasing global emissions by 45% by 2030 and achieving net-zero emissions by 2050 to limit global warming to 1.5 degrees Celsius. 

"In the past, people cared about how much oil and gas was coming out of the ground but now the amount of solar and wind that's being produced is what matters most," says Whitehead. Contracts to manage renewables' “volume risks,” which refer to production falling below a historical benchmark, are in high demand.  

"These contracts have been extremely active in Europe," says Whitehead. "We see everyone looking at them, from wind farm owners worried about low wind levels to energy participants worrying about too much of it [supply] depressing prices."

Speedwell is receiving a slew of inquiries form current and potential customers in Europe (notably Germany, Netherlands, U.K., France and Belgium), the U.S. (chiefly in Texas and across California), as well as in Asia-Pacific and Australia, asking how they can address weather and climate-change risks in more innovative ways. 

Nick Ernst, managing director at BGC Partners, said firms are using Speedwell's historical indices to assess how much wind they would produce for a particular period, structuring long-term agreements.

"Basically, you look at the past 10 years of data to use as a benchmark for what your production could be," he explains, adding that his team is currently using such input to broker a call option tracking Germany's first-quarter wind production.  

Extreme Weather

Extreme weather events, such as rising floods and droughts, are also driving demand for climate-based derivatives, and not just from businesses. 

Dubai, for instance, is currently looking for ways to stem losses from disruptive weather, such as the intense rains and flooding in April, an unprecedented event in an otherwise dry jurisdiction, according to Ernst. 

Meanwhile, Norwegian renewables firm Statkraft is boosting its use of CRT derivatives to offset meteorological risks, says U.K. Power Desk Director Matthew Hunt.

The current attention on CRT derivatives highlights that more companies are thinking about managing overall risks in energy markets.

"The idea that this is a flash in the pan is wrong," says Hunt. "We are having a massive expansion in renewable generation, which the Russia-Ukraine war has intensified because of the need to shift away from natural gas. This is only set to continue."

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About the author

Ivan Castano
Ivan Castano

is a seasoned financial editor, corporate content specialist and journalist with over two decades’ experience writing for leading publications including Bloomberg, Forbes, Barron’s, MarketWatch, Euromoney and FT groups, among many other leading titles. He writes about emerging markets, finance, technology and investing.

 

 

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