February 8, 2017 / 12:42 PM / 2 years ago

Bourses' weather products hard to place in European energy market

ESSEN, Germany (Reuters) - In theory, a European energy market for weather derivatives should thrive in a region with seasonal changes, but bourses Nasdaq (NDAQ.O) and EEX (DB1Gn.DE) have seen little demand for wind power contracts launched in 2015, industry experts said.

“Most European utilities consider weather risk management as strategically important,” Jens Boening, head of weather derivatives at EDF Trading (EDF.PA) in Britain, told a conference this week during Germany’s E-World trade fair.

“But the weather derivatives market is still in its infancy,” said Boening, whose company offers financially settled weather contracts to the industry.

Wind contributes 12 percent of Germany’s power generation, creating risks for producers in calm and stormy periods because of the unpredictability of speed patterns and hence likely income and losses.

A German wind strength index offered by Nasdaq Commodities DNAQ.O since 2015 won a first as-yet-unidentified market maker as of November 2016, but the value of its peak monthly volume amounted to just several hundred thousand euros.

EEX, part of Deutsche Boerse, also launched a German wind power future last year, but has not yet reported any trades.

“There is an assumption that the wholesale power market already reflects the weather,” said Konstantin Lenz, Germany country manager for commodities at Nasdaq.

“We just have to be patient.”

Peter Reitz, chief executive of EEX, said his bourse was not flustered by slow uptake of its offering, being aware it had introduced a niche product.

“We won’t measure success by trading volumes in the first 24 months,” he told Reuters. “We aim to change thinking around how to integrate renewable power into the market.”

Prior to the surge in renewables in Germany and wider Europe, big utilities had started hedging weather risks around gas, power and water supplies, given awareness of climate change and the emergence of traded products meeting their demand.

Products such as wind, sunshine and rainfall emerged over the past two decades, allowing risk hedges for customers as well as profits for hedge funds, classic insurers and reinsurers.

This business is continuing - to the tune of hundreds of millions of euros a year, the industry estimates.

But it is placed bilaterally between vendors and utilities, whose energy trading floors often also offer secondary weather products to smaller peers.

Reinsurers dominate the sell side because they cover worldwide weather risk outside energy and can spread energy risk across their portfolios, preferring to keep details of such bilateral deals under wraps so as not to endanger their business.

This suits both parties well so far.

“The bourses cannot tailor their weather products as well as the over-the-counter markets,” said Ralph Hungerbuehler, senior originator for weather and commodity risks at Munich RE. “Even for us, it is sometimes hard to gauge customers’ behaviour.”

He was referring to a sector with a handful of players, where reinsurer Munich RE and rival Swiss RE (SRENH.S) hold top spots.

The weather market may become more active in the next decade, when renewable producers emerge from subsidised payment schemes, experts said.

“I know that disruption risks for newly built wind parks can already be calculated very well,” said Nasdaq’s Lenz. “Word has to go round among bankers and investors that it is advantageous (to hedge weather risks).”

Editing by Dale Hudson

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