Axia Energy Europe expects to close its first stream flow derivative deal in Europe by the fall. Bill Gebhardt, director of weather derivatives in London, said preliminary talks started with hydroelectric power players a couple of months ago about the derivatives, which pay out if water flow is below a predetermined number of cubic meters per month. It has taken until now to get deals in place because risk managers needed to be educated about the products, he added.
Gebhardt said at the moment most hydroelectric companies hedge risk using precipitation derivatives, but stream flow derivatives would reduce their basis risk because it is the stream flow that is important for the amount of power they produce, and factors such as snow melt can affect these levels. Axia Energy in the U.S. has already closed several of these transactions, but it is only starting in Europe now because the desk was not set up until this year (DW, 3/25).
Gebhardt expects most of the demand to come from Switzerland, Germany and Austria because energy companies based there are sophisticated users of weather derivatives and produce a lot of their electricity using hydroelectric facilities.
