Electric Utility Plans Weather Debut
London Electricity plans to start using weather derivatives before year-end to hedge its exposure to gas and electricity prices. Jack Watkins, energy trader in London, said "It would be foolish not to [hedge exposure to the weather]." The company has been looking at hedging for five years but has not entered weather contracts yet because the market was too illiquid. London Electricity has decided to make the plunge this winter because of increased liquidity in plain-vanilla options and the increasing number of bespoke products.
It is especially interested in using options, which have a minimal basis risk between the hedge and the exposure. These would included options which pay out in gas or power but are triggered at a certain temperature rather than commodity price. Watkins declined to detail the size of its exposure, but said "we will be an active player." The company has been talking to all the major participants, including Enron, BNP Paribas and TXU Europe Energy Trading.