After spending about $380 billion over the past decade to nearly double wind power capacity in Europe, utilities are now turning to an obscure and little-known market to protect themselves against a prolonged bout of calm weather.
The wind drought is a reminder that no matter how much you build, actual generation will always be dictated by how much it blows. Wind speeds across Europe during February to April likely had their biggest drop from long-term averages since 1940, according to data from the University of Maine’s Climate Change Institute.
As a result, utilities are turning to the weather derivatives market and they are striking more wind hedging deals for this summer than in the past, said Senior Structurer Pierre Buisson at reinsurer Munich Re. He’s worked on four to five major requests recently, more than usual, and the focus has now turned to the summer months, he said.
“Interest in wind hedging has grown significantly over the last two to three years, and the current wind drought has added more fuel to the fire,” said Ralph Renner, a former power trader and head of origination at Parameter Climate, who advises companies on hedging.
In Germany, for instance, wind power output was 30% lower in the first quarter than a year earlier, boosting the activities of coal and gas plant operators, according to a report published Tuesday by the Working Group on Energy Balances.
Operators are buying contracts that offer protection against lower-than-expected wind output. So, if a utility expects to produce a certain amount of terawatt-hours of wind power during a set period, but falls short due to insufficient wind speeds, it will receive compensation from their counter party — Munich Re, Swiss Re AG or other similar firms.
Weather derivatives have been around for decades to protect against adverse weather patterns. They are common in other industries too, from farming to sporting events, travel and entertainment.
