Should gas suppliers use weather risk management to soften price rises?

by Artemis on December 2, 2010

Natural gas suppliers receive a lot of bad press in Europe, particularly in the UK, over rising prices and supply issues. Wholesale gas prices have been on the rise for a number of years and those price rises are always passed on to the consumer. A Reuters article got us thinking that perhaps it need not always be like that.

In many cases gas price rises can’t be avoided as they are passed down the supply line from exploration to production to supplier, but sometimes it seems gas companies could smooth the rises using weather risk management techniques.

The Reuters article in question discusses the freezing weather that the country is currently experiencing, the coldest weather with the most snow so early in the year for a long time, and how the cold snap is going to affect gas supplies and prices.

UK gas suppliers have already had to start tapping into gas storage facilities at this early stage of the year. This is going to mean reduced supplies throughout the winter and price rises which will be passed on to end users.

However, the reason for tapping this facility so early is purely down to colder than normal weather, something that it seems the gas suppliers could be hedging against. They possibly are, but the benefits of the hedge don’t prevent the prices going up. Should gas companies be forced to use weather risk management to smooth prices and soften price rises for consumers? It would seem a sensible use of the tools readily available for businesses to use to hedge their weather risks.

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