Energy and commodities behemoth Enron and Korean consulting firm WeatherMoney are looking at offering weather derivatives to Korean power companies because of deregulation in the country's power industry. Earlier this month, the government split the monopoly electricity producer Korea Electric Power Corporation into five regional companies and one nuclear energy company. When a country deregulates its power industry, competition often spurs power companies to become more sophisticated in managing risk, said Sangwook Ahn, ceo of WeatherMoney in Seoul.
The weather derivatives market should grow as a result. Ahn estimates that about KRW2 billion (USD1.5 million) of weather cover contracts will trade this year, a number that could leap to KRW200 billion next year. Although the market has mainly used insurance contracts until now, the expected growth should allow weather derivatives to take off. Once there is sufficient potential liquidity in the market, players often prefer derivatives to insurance contracts, as derivatives are standardized and can be traded more easily.
Mark Tawney, head of weather derivatives at Enron in Houston, said the company is carrying out a feasibility study on the Korean market. He added that if it decides to enter the market the first step would be to add weather contracts based on Seoul to its online trading platform, Enron Online.
WeatherMoney already plans to start offering derivatives by year end, according to Ahn. The company is looking to hire a weather derivatives structurer and a salesperson.
