Wind of Change
Wind of Change
Wind power has been playing a significant role in transforming the energy market in Europe. Here are some of the ways wind power is transforming the energy market in Europe:
· Increasing renewable energy generation: Wind power is contributing significantly to the growth of renewable energy generation in Europe. According to the European Wind Energy Association, wind power is the second-largest form of power generation in Europe, after natural gas. Wind power accounts for around 14% of the total electricity generation in the European Union (EU).
· Reducing greenhouse gas emissions: Wind power is a clean source of energy that does not emit any greenhouse gases or air pollutants. The increased use of wind power in Europe is reducing greenhouse gas emissions and helping to mitigate climate change.
· Lowering electricity prices: Wind power is becoming increasingly cost-competitive with other forms of electricity generation. The cost of wind power has fallen significantly in recent years, making it an attractive option for utilities and consumers. This has led to lower electricity prices in some parts of Europe.
· Creating jobs: The wind power industry is creating new jobs in Europe. The European Wind Energy Association estimates that the wind power industry currently employs over 300,000 people in Europe. The growth of wind power is expected to create even more jobs in the future.
· Increasing energy security: Wind power is a domestic source of energy that can help reduce dependence on imported fossil fuels. By increasing the share of wind power in the energy mix, Europe can enhance its energy security and reduce its reliance on foreign energy sources.
In summary, wind power is transforming the energy market in Europe by increasing renewable energy generation, reducing greenhouse gas emissions, lowering electricity prices, creating jobs, and increasing energy security.
But there is something else. Wind and solar power generations are also deeply modifying the climate risk transfer market. To explain this, let me give a summary of the weather derivative market history.
The weather derivative market is a financial market that allows individuals and organizations to hedge against or speculate on the impact of weather events on various industries. Weather derivatives are financial instruments that derive their value from specific weather-related variables such as temperature, precipitation, or wind speed.
The market for weather derivatives emerged in the 1990s as a way for companies to manage weather-related risks, particularly in the agriculture and energy sectors. Since then, the market has grown significantly and now includes a wide range of participants, including energy companies, insurance companies, farmers, and investors.
Weather derivatives can be structured in a variety of ways, including options, swaps, and futures contracts. They are typically settled based on objective weather measurements or data, such as temperature readings from a particular location, and can be customized to meet the specific needs of individual users.
The weather derivative market is still relatively small compared to other financial markets, but it has grown significantly in recent years as awareness of climate-related risks has increased. However, the market was also subject to a unique concentration challenge: Warm Winter in Europe.
The relationship between gas demand and temperature is closely tied to the fact that natural gas is a primary source of energy for heating homes and buildings. As the temperature drops, the demand for natural gas typically increases as people turn up their thermostats to stay warm. Conversely, as the temperature rises, the demand for natural gas decreases as people use less energy to heat their homes.
This relationship between gas demand and temperature is often referred to as the "weather sensitivity" of natural gas demand. In general, the colder the weather, the more natural gas is needed to maintain indoor temperatures, and the warmer the weather, the less natural gas is required.
This relationship can be observed in real-world gas demand data. For example, during cold winter months, when temperatures are low, natural gas demand typically spikes as people turn up their heat. In contrast, during the summer months, when temperatures are high, natural gas demand tends to decrease as air conditioning usage increases and less energy is required for heating.
This relationship between gas demand and temperature is important for energy companies and investors who trade natural gas futures and other derivatives. It also has important implications for energy policy and infrastructure planning, as changes in temperature patterns and weather conditions can impact the overall demand for natural gas and other energy sources.
The issue for the risk takers is that they used to face the same risk: all fossil fuel energy companies were hedging against the same weather pattern: warm winters. Risk takers had difficulty absorbing the colossal size of the risk. The primary issue was the lack of diversification of their portfolio. There was simply too much of the same risk. By taking in their books the energy companies’ financial volatility linked to weather, they were on one year heroes and the next year they were facing colossal losses. I have sadly seen many desks closed in the 24 years I have been in this market.
The energy transition is modifying the energy mix and this in turn is providing to the climate risk market a much-needed diversification. Until recently the weather market was used to transfer gas demand side risks. Now the weather climate risk market is used to hedge both energy supply and demand risks. Books can finally be more balanced!
Over the years, the CME has been providing Heating Degree Days, Frost Days and precipitation contracts. They were hugely successful before 2008 and the CME markets are still active even if the market is OTC first. It is time for exchanges to list other contracts: Wind, Solar either as pure volume contracts or the new indices that Speedwell Climate and EPEXSpot have published related to Revenues, Shape and Cannibalisation risks.
See those mini articles for references:
https://www.dhirubhai.net/posts/michaelmoreno_powergeneration-activity-7036623788423151616-_Tee
With ubiquitous access to data (thanks to Speedwell who farms and cleans 24-7 worldwide data), and with the energy transition taking place, the weather is the new fuel. The climate risk market is booming. A wind of change is coming. Power trading desks will soon be Climate trading desks first.
Speedwell Climate is the leading provider of data for the climate risk transfer business. We also provide the Speedwell Environmental System for pricing and managing climate derivative contracts. Speedwell Climate also provides independent valuations of weather derivatives, quanto pricing, and portfolios of climate risks.