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2016 Executive Council

 

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About The Weather Risk Management Club

Are you interested in how weather affects a wide range of industries, including energy, agriculture, insurance, construction, retail, and transport? Do you wish to work professionally at this intersection of meteorology and risk management? Then join the Weather Risk Management Club!

Email: Scott Matuszewski (sjm5759@psu.edu)

 

 What Is Weather Risk?

Weather Risk is the uncertainty in cash flow and earnings caused by weather volatility. Many energy companies have a natural position in weather which is their largest source of financial uncertainty.

  • Colder than normal summers reduce electric power sales for residential and commercial space cooling. These cooler temperatures idle capacity, raise the average cost of power production, and reduce demand for natural gas and coal energy feedstocks.
  • Above average winter temperatures reduce natural gas and electric power sales for space heating.
  • Lower than normal precipitation upstream of hydropower facilities reduces power production. This reduces revenues to the facility and diverts buyers of hydropower to higher cost power alternatives. Independent power producers often have weather adjustments built into their fuel supply contracts. When weather events trigger these adjustments, fuel supply costs can skyrocket. In extreme cases, fuel supply and business operations are temporarily interrupted.

In a survey of 200 top U.S. utility company annual reports, 80% cited weather as a major determinant of earnings performance. About 50% claimed weather was responsible for poorer than expected performance. These figures demand effective Weather Hedging and Risk Management programs. However, in comparison to other types of business risk, weather risk has been deficient in hedging and management alternatives.

 

 Weather Hedging And Weather Risk Management

Everyone knows you can’t change the weather. One-hundred years of scientific research has proven that you cannot forecast the weather beyond a few days with enough accuracy to support sound commercial decisions. However, if you’re like many energy companies, you do experience operating results that correlate well with common weather statistics, such as cooling and heating degree-days. This makes it possible to derive financial products based on weather outcomes which can be used to transfer your weather risk to counter parties in a better position to manage it. Today we find insurance companies, commercial banks, investment banks, large energy companies and trading companies maintaining large portfolios of diverse risk investments. They are now ready and willing to underwrite weather hedges in the form of custom OTC contracts that settle on weather statistics.

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