The UK’s Guardian newspaper reports that some of the local councils in the UK (local government authorities) are seriously looking at weather derivatives as a way to hedge the excess costs of severe winter weather. The UK has been hit by two severely cold winters with unusual amounts of snow and ice in recent years, but this year has been surprisingly warm with very little freezing temperatures. As a result the local councils have found budgeting difficult and potentially costly and so are looking to weather hedging for a possible solution.
Research from the Guardian newspaper showed that local councils across the UK have overspent on their winter budgets by up to 100% in the cold years. They need to find a way to smooth their budgets and provide a hedge for the extremely cold years. Weather derivatives is one option that Lincolnshire council are looking at according to the article. A representative from Lincolnshire council said “We are looking at derivatives on a trial basis. Last year, we would have saved £1.5m. Derivatives could help generate considerable savings. However, usage [of derivatives] could also potentially be an additional cost. With the mild winter this year we would so far have been out of pocket.”
It’s interesting to see these local councils looking to weather derivatives and bodes well for the markets future as adoption increases.