Norwegian state-owned utility Statkraft is considering making its first major use of over-the-counter derivatives to hedge weather-related risks. An official in Oslo said the state owned utility has significant exposure to fluctuations in rainfall because it is the country's leading hydroelectric producer. "We have a mean production of 33 TW/h per year of hydro production, which can be affected by both precipitation and temperature and can vary a lot," the official explained. Statkraft is considering using weather derivatives now because the market is becoming more liquid. "Our approach is that we have weather risk and so a part of risk management is to consider whether that can be hedged and what is the cost," he said. "Our experience so far is that it has been too expensive."
Furthermore, the official added the demise of Enron does not bode well for its immediate entrance into the market. "Enron certainly doesn't help the situation," because of liquidity, he noted. The official added Statkraft has been approached by a handful of market makers, including Aquila and Société Générale. "In the end it depends on where the bid/offer spreads are and we just don't know yet," he continued, declining to quantify how much liquidity would have to improve for the company to dip its toes into the sector.
