PD1.1 Weather Risk Management and Renewable Energy

Wednesday, 26 January 2011: 9:15 AM
4C-2 (Washington State Convention Center)
Lawrence Heitkemper, MDA Information Systems LLC, Gaithersburg, MD; and C. Hanson and T. Hamilton

Since 1999, the Weather Risk Management Association (WRMA) has represented those organizations providing services relating to non-catastrophic weather risk. WRMA has made major contributions to standardizing documentation of weather transactions and establishing credit standards and margining procedures. WRMA has worked with governments to introduce weather risk management into national regulatory frameworks and foster education of markets and public consciousness of weather risk and its management through conference activity and working groups. As an organization, WRMA would like to propose a panel on weather risk management and renewable energy.

The panel members will discuss what is weather risk management, how it is used, the role of weather forecasting and data, and the importance of weather risk management tools for the renewable energy industry. Panelists may supply PowerPoint presentations, but won't be submitting manuscripts. Weather risk management is the mitigation of financial risk triggered by the weather. Financial weather risk occurs when a weather event or variations of a measurable weather index – temperature, rainfall, etc. – causes losses to either property or profits for an individual, government or corporation. A large percentage of the world economy feels the financial impact of the weather and can now respond proactively by using weather risk management tools. These financial instruments allow businesses in many sectors to mitigate the effect of weather on the bottom line. Weather impacts volume, and as all businesses know, price multiplied by volume equals revenue. By managing the impact of weather, companies can lower earnings volatility. While reducing the volatility due to weather does have a cost to any company's budget, it can increase returns on a per unit of risk basis. Weather risk mitigation can potentially improve stock valuations and the cost of and access to financing as well. Since the late 1990s, many industries have used weather risk management tools – insurance, derivatives and futures – to offset weather risk. Many companies only consider the weather when affected by floods, hurricanes and other catastrophic weather events. But, weather affects corporate bottom lines on a daily basis. Financial losses that can be incurred by day-to-day weather can chip away at profit. By the end of the financial year, a company's losses attributed to weather can be substantial.

Weather risk management begins with an assessment of the type of manageable weather risks that could impact a business. These are: temperature, precipitation, snowfall, wind speed, stream flow, sunshine hours, etc. By identifying the weather risks, a company can then proactively choose the best weather risk management tools to mitigate that risk. New tools are being introduced to help renewable energy producers hedge their risk. Wind, solar, and hydro electricity facilities are all dependent on the weather. Sometimes all the factors are in place for these renewable energy source to provide power. Sometimes, the wind doesn't blow, the sun is hidden behind clouds and water levels are too low. What happens then? And how can companies offset the losses? This is where weather risk management tools come into play.

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