6th annual Weather and Energy conference: focus on weather hedging beyond temperature-related risks

6th annual Weather and Energy conference: focus on weather hedging beyond temperature-related risks

Weather and Energy team of Swiss Re Corporate Solutions welcomed its existing and potential clients at Mogens Dahl Koncertsal, Copenhagen on the longest day of the year.

Over 80 experts from approximately 50 energy and financial sector companies gathered on 22 June 2016 to discuss the latest trends in European weather risk management.

Temperature-related risks becoming common sense

A growing number of companies in Europe realize that weather affects their business and corporate performance. For them, weather risk hedging is no longer an exotic instrument - most European utilities by now are familiar with hedging the risk of unusually warm winter temperatures. Their profits have been shrinking after the third warmer-than-average winter in a row, and they are asking themselves whether this is "the new normal".

At the conference this group of participants benefited from a presentation by Martin Qvindeskand Groennevet, Chief Meteorologist from StormGeo, focusing on the weather outlook for the upcoming European winter. While it is too early to reliably forecast that, early signs seem to point in the direction of a mild season to come.  

Zoe Double, Head of Power at ICIS, the intelligence provider on energy market trends and prices, gave an update on the price developments for gas, coal, LNG on European markets and impact of growing renewable energy capacity. In particular, she spoke about the reasons for the current situation with gas oversupply due to Norway increasing production and Gazprom protecting its market share, among other reasons. She also discussed the impact of covering power demand to 100 % by renewables - earlier this year in Germany it led to the negative energy prices and hit market participants by surprise.

Jakob Held from Fortum Värme, a municipal utility company from Sweden, shared his company's experience with hedging temperature-related risk last winter and thoughts on optimizing the approach in the future.

Energy industry in transition - utilities under pressure to adapt

Key note speaker, Dirk Mausbeck, CEO of Danske Commodities, spoke about the transformation of the current energy industry landscape and its impact on the utilities’ business model. Some of the drivers here are the climate change and new market situation - steadily growing share of renewables in the European energy mix, decreasing oil and coal prices as well as unstable energy demand.

The energy market continues going through fragmentation and decentralization. Large utilities are being replaced by small and medium-sized utility companies. New and non-traditional investors have also begun to enter the market, for example Apple starts delivering energy in the US, and Google develops energy optimisation tools for households. Hedgefunds, foreign investors and pension funds are investing directly into the off-shore wind and biomass.
In this environment, European utilities have no chance but to adapt and re-invent themselves. "To get there, we need to specialise. We need to be flexible, if utilities want to survive in 20, 30 or 50 years from now. This flexibility is required within the companies we work for - in relation to the leadership, employees, entire business models," Mausbeck said. He also mentioned the need to cooperate and consider strategic partnerships - between big utilities and insurance companies handling weather derivatives, for example.

New directions in weather hedging beyond temperature-risks

More European companies, not exclusively from the energy sector, realize they need to look at weather risks more broadly and apply a multi-asset risk management approach along entire value chains. Furthermore, they start looking into non-temperature related weather factors driving their companies' performance.

The uncertainty of wind is not only just a risk for wind power producers - it is a key driver of power prices in several European markets and affects energy traders. An array of new products is available to take the wind risk out of power trading. In parallel, more hydro producers have started to consider hedging their risks related to the lack of rainfall and unstable river flow exposure.

A group of speakers at the conference addressed the needs of this wider group of clients, beyond utilities, and shared their insights on the emerging hedging products and approaches related to wind and hydro production.

Another keynote presenter at the conference, Henrik Stiesdal, Danish inventor and businessman, has been active at European wind market since its inception. According to him, wind power is still the best solution for the long-term large-scale renewable energy production in Northern Europe – but challenges remain due to the prohibitive costs of offshore construction and due to the energy production variability.

Regis Decoret, Head of Wind Energy, 3E, spoke about managing uncertainties related to the pre- and post-construction performance of the wind turbines. He described methodologies used to predict a wind farm's production before the actual construction starts, reporting on a new study examining operating windfarm data.

Heike Santen
, Head of Hedge Management, Vattenfall Trading Group, shared her thoughts about why and how to hedge hydro power. Hydro power generation is exposed to volumes, price and dispatch decision risks. While most of the price risks can be hedged away, considerable volume risks remain. Hedging preference could be determined by looking at how the company’s financial performance will be affected by the actual risks.

Sharing international perspectives, Rodrigo Violaro, Head of Origination, Swiss Re Corporate Solutions in Latin America, presented a case study on a hydro power example from Columbia. One of the largest energy generating companies in the country protected itself against the risk of uncertain river flow. This allowed the company to secure cash flows for future investments, keeping the dividend flow to the shareholders at a constant level.

During the final session, panel discussion participants looked at different hedging practices observed around the globe. The group agreed that whereas strategy preferences vary in the US, Australia and Europe, the market would benefit from new entrants of further industries bringing in a wider range of risks and increasing the trading activity.

Juerg Trueb
, Head Environmental & Commodity Markets, Swiss Re Corporate Solutions,  summarized: "This was the largest and the most diverse group of participants we had since the inception of our annual conference. This highlights the growing demand and interest in innovative weather risk management products."

Stuart Brown, Head Origination Weather & Energy for EMEA and Asia Pacific, added: "It is also an indication we were successful in establishing this annual conference as a recognized forum for industry experts with participation of high quality speakers. We received many complements from the participants who appreciated relevant expert insights, which help them do their business better."

Presentations from this conference can be available upon request.

Are you interested in attending the 7th annual Weather and Energy conference in 2017 (location and date to be confirmed)? Please get in touch.

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6th Annual Weather Energy Conference

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