European Energy Exchange AG, the EEX, is planning to launch exchange traded wind power derivatives and futures as a response to the “energy turnaround” which sees renewables increasing their share of global energy production.
Weather derivatives and weather hedging tools are going to play an increasingly important role as the energy markets turn towards renewables. Germany is one of the energy markets that is shifting towards renewables at the fastest rate and the EEX, which is majority owned by Deutsche Boerse’s derivatives exchange Eurex, is keen to be at the forefront.
“The energy turnaround, which results in a further increase in market share for renewable energies, necessitates the further development and optimisation of the existing power market. This also includes the need for new products, which will contribute to our success in coping with the challenges of the energy turnaround,” explained Peter Reitz, CEO of the EEX. “For us, turning the flexibility demanded by the market into tradable commodities whose price is established on the market, constitutes one of the most important challenges.”
As part of these efforts the EEX will look to the weather derivatives market for product inspiration, to create tools that can be traded on the exchange that can help to make the energy turnaround more successful and a smoother transition.
As renewable energy increases its share of the market the factors that affect production levels will become increasingly important. Weather factors and conditions are therefore set to play an increasingly important role in the supply of energy, as a result of which the ability to hedge, manage and transfer weather risks will also increase in importance.
The EEX spent some time analysing how these weather uncertainties could be covered individually with the help of standardised trading products, in addition to trading in the power price itself, the weather futures initiative is the first product to launch.
The EEX wind power futures are designed to provide a simple and exchange traded tool that enables the dedicated hedging of wind risk in power generation. Using a wind power index created by Deutsche Boerse, the EEX’s Wind Power Futures are said to be the first “standardized exchange traded wind power derivative.”
The index against which the futures trade and settle is the Deutsche Boerse Wind Power Indicator, which provides measurements of the daily expected wind power generation normalised to available capacity (MWh per available MW). The index is constructed using a synthetically calculated 30 year history for wind power production.
The exchange traded nature of the wind power futures means that there will be a reference price for wind power generation, allowing for hedging of wind uncertainty or volume risk and wind induced power price volatility.
The first wind power futures will be launched for the countries where the index covers currently, so Germany, Austria, Denmark and the UK, with monthly, quarterly, seasonal and annual futures contracts available.
The contracts are expected to be made available for trading from this summer.
As renewables become increasingly important and contribute an increasing amount of power generation, weather risk management will become vital. This will provide opportunities for the capital markets to provide sources of weather risk transfer capacity, as a number of insurance-linked securities (ILS) managers do today.
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