E.ON Trading and MVV separately are planning to use weather derivatives for the first time to hedge exposure on their electricity and natural gas trading books. Oliver Podehl, an electricity trader responsible for the weather derivatives project at E.ON Trading in Munich, said it has not hedged weather risk previously because of manpower limitations. He expects at least two more power traders to join the 20-25 strong team in the next month and the long-term plan is to double this number. He declined to give a time frame for the doubling. The extra personnel will allow E.ON to trade more products. The company also needs to finalize internal pricing tools and risk management mechanisms before it starts trading.
E.ON expects to start using derivatives to hedge its 45 TWh electricity trading book in two months, Podehl said. Once the company is comfortable using the derivatives for hedging it will look at the possibility of setting up a weather derivatives trading book.
MVV is looking at pursuing a similar strategy for its 3 TWh electricity trading book, according to Paul Orstavik, power trader and analyst at MVV in Mannheim. Orstavik said a lack of liquidity has prevented MVV entering the market before now.
Juerg Trueb, head of the global weather desk at Swiss Re New Markets in Zurich, said "E.ON Trading and MVV looking at weather derivatives is exciting news and will give a signal to others to use weather derivatives."
