Managing weather risk

It is estimated that the weather indirectly or directly influences the revenues of two out of three companies. The first sector which wanted to “tame” this risk was the energy sector. Energy producers have realized for a long time how high the correlation between energy demand and temperature in a given time is. That is why the companies from this sector, as a result of deregulation of the US energy market at the beginning of the 90’s of the last century, originated transactions called weather derivatives. The possibilities of using instruments of this class in managing weather risk in the company were supported in the world by a substantial number of studies and publications. Its consequence was a dynamic development of the market for these instruments in the United States, Europe, or Asia.

System changes which currently happen in Poland due to liberalization of the energy market directly encourage to use weather derivatives as reliable tools to compete for a client and protect the company from unfavorable weather conditions. Besides, it should be clearly stressed that progressing climate change over consecutive years as a result of rising carbon emissions levels will additionally contribute to an increase in weather variability. It means a progressive increase in the variability of revenues of companies which are exposed to weather risk, mainly energy companies.

What can Consus Group help you with?

1. Conducting the analysis of identification and quantification of the company’s exposure to changes in weather. At this stage, based on information and historic financial data received from the company it is determined:
- the number of essential weather indices which influence the company results,
- the size and intensity of the company’s exposure to the change in individual indices.

2. Conducting a valuation study and effectiveness assessment of chosen constructions. Based on arrangements with the interested company it is determined:
- the protection mechanism and its parameters,
- the effectiveness assessment of a chosen protection measure as an estimate,
- the price of protection,
- the list of protection providers and the way of delivering it. 

3. Conducting a legal evaluation. Having information concerning the type of instrument (policy or derivative) and the value of collateral, legal (e.g. public procurement procedure), accounting (according to ISA 37), and tax responsibilities are determined.
 

4. Arranging the transaction, helping in conducting it, and intermediation.