Entergy-Koch Trading plans this week to launch what it considers to be the first indices on wind power and will offer derivatives based on them to wind-power generators in Europe and the U.S. The indices will measure the deviation in wind strength from normal levels in parts of Europe and the U.S., including northern Germany, Denmark and Texas, according to David Pethick, senior quantitative analyst in London.
Wind derivatives have not taken off before because risk managers of wind-power electricity generators were not satisfied with the basis risk between where the wind speed is measured and where their wind farms are situated, according to Pethick. He added Entergy-Koch has got around this problem, but declined to elaborate.
Entergy-Koch is launching this product now because of an increase in demand for renewable energy, such as wind-power generated electricity. The energy company will focus its attention in Europe as there is more interest in renewable energy there than in the U.S. The European Wind Energy Association predicts the amount of electricity generated by wind power will increase to 65,000 MW by 2010 from approximately 13,000 MW at the end of last year.
Pethick said it will offer puts and calls on the indices and structure them based on average wind power, rather than an absolute measure. In an example trade, a wind-power generator would buy a put struck at 90% of the value of an index. This would hedge the company against low winds hindering output. Options longer than a month maturity will likely have multiple strikes for each month, as the absolute levels of wind will vary with the season. Because most of the demand will be for downside protection the energy company will not have a naturally hedged book. However Pethick said it will be hedged through the diversity of locations since the probability is low of light winds simultaneously in Spain, Denmark and the U.K.
