News March 2000 Williams to dip toe in weather market Williams Energy Services is to begin trading weather derivatives "within the next few weeks", according to David Shields, director of emerging products at the Tulsa-based energy marketer and trader. The company will initially use weather derivatives to hedge its own weather exposures, which run to hundreds of millions of dollars per year, he says, but is also considering transacting weather trades on behalf of its customers in the future. In January, Shields' superiors gave his group approval to use weather derivatives to reduce risk, he says. The company assumes energy risk from its clients within the utility and energy sectors, absorbing their exposure to changes in price or demand for electricity or gas, for example. It typically does so by selling its clients options, and using part of the income generated to hedge its own risk. In some cases, says Shields, weather derivatives would provide a cheaper or better-fitting hedge than trading in the commodity itself. Budget holds emissions key Industry lobbyists are hopeful that the UK's March budget will contain financial incentives to encourage emissions trading, and an increase in the number of sectors eligible for discounts to the climate change levy (CCL). The prime minister, Tony Blair, is keen for an early start to emissions trading - which analysts say requires 'pump priming' measures. It is unclear, however, whether the Treasury will be prepared to find the money. Blair expressed his support for emissions trading to begin in 2001, in line with recommendations from the Emissions Trading Group (ETG), according to those present at a climate change seminar at Downing Street on February 28, comprising representatives from industry, trade unions, and NGOs. Schroders steps up to SRI plate Schroders Investment Management is finalising a series of measures to present a more 'socially responsible' face to its clients. The fund manager is shortly to announce new policies on engaging with companies on social and environmental issues, and on formally incorporating social and environmental analysis into the investment process. The company - Britain's second largest active fund manager, with assets of £66 billion ($106 billion) under management in the UK - declined to give further details of the measures, except to confirm that it is to inform clients of the new measures in early March. But it is understood to have set up a team dedicated to addressing issues relating to socially responsible investment (SRI). Emissions trades to take to North Sea? The UK government and the oil and gas industry are considering a market in permits for greenhouse gas emissions from offshore gas flaring. The plan, which could be in place next year, will see companies with North Sea oil platforms allocated a gradually falling number of tradeable permits to burn off excess gas from drilling - known as 'flaring'. Emissions caused by flaring in the North Sea have fallen by 23% in absolute terms, and 40% by unit of production, between 1990 and 1998, the last year from which accurate figures are available. However, industry analysts say that flare reductions are beginning to bottom out, and a new approach is needed. New funds eye carbon credits A new private equity fund which aims to reduce energy consumption and emissions of greenhouse gases in central and eastern Europe has been launched by the European Bank for Reconstruction and Development (EBRD) and the Franco-Belgian banking group Dexia. The Dexia-FondElec Energy Efficiency and Emission Reduction Fund aims to raise E150 million ($150 million) and will be managed by specialist US fund manager FondElec. By the initial closing in February, the fund had attracted a total of e 61 million. Dexia's international subsidiary, Dexia Project and Public Finance International Bank (PPFIB), and the EBRD have each committed E20 million with the remaining e 21 million coming from Marubeni Corporation, Kansai Electric Power and Mitsui and Co Europe. UK, Brazil look for CDM answers Two environmental consultancies have launched a two-year UK-Brazilian initiative to examine how the Clean Development Mechanism (CDM) of the Kyoto Protocol will work in practice. The UK's Enviros Aspinwall and Brazil's Fabio Feldmann Consultores, together with legal advisors Baker & McKenzie, are looking for two 'demonstrative projects' in Brazil which will be expected to qualify under the CDM when its rules are set out. One of the initiative's key goals is to examine how financial institutions can be involved in funding such projects. This includes the design of instruments to make financing CDM projects attractive to international banks. Such banks typically favour financing large projects, but it is likely that the CDM will encourage the creation of large numbers of small projects, particularly in renewable energy and rural electrification, for example. ProVention is better than cure, says World Bank A multi-national partnership of insurance companies, development banks, national governments, aid agencies and academic institutions has been put together by the World Bank to try to reduce the human and economic costs of natural disasters in the developing world. The grouping - known as the ProVention Consortium - marks a shift "from response to preparation, from relief to a strategy of risk reduction and risk transfer," says Alcira Kreimer, the Washington-based manager of the World Bank's disaster management facility and principal architect of the initiative. "Disasters will still occur, but if prevention and mitigation are taken seriously the massive human and economic costs we have seen in recent years are not inevitable," she adds. The bank is currently raising money for a trust fund which is intended to support the initiative at a rate of $10 million a year for three years.. Enron, Koch tackle weather on the web Two of the largest weather derivatives dealers are turning to the internet to increase the transparency of the market and boost sales of weather products. Enron's existing counterparties are now able to transact weather derivatives online with the energy company, via its EnronOnline system. Its rival, Koch Industries, is planning to launch an analytical tool to enable prospective end-users to assess their weather exposure and see how that exposure changes when simulated hedges are established. Kyoto loophole lets Australia emit Australian industry will have to do practically nothing to reduce greenhouse gas emissions - yet the country will still comply with the Kyoto Protocol, according to a new report. The Australia Institute study says that the inclusion of carbon emissions caused by land clearance in calculating Australia's 1990 baseline - against which future emissions cuts will be judged - means that emissions from fossil fuels could rise by up to one third without Australia missing its targets. Australia successfully argued for the inclusion of emissions caused by land-use change in Article 3.7, late in the day during the 1997 negotiations. At the time, such emissions (mainly caused by clearing land for grazing) accounted for around 20% of the country's total greenhouse gas (GHG) emissions. But Australia's emissions from land-use change have been falling rapidly since 1990, for reasons unrelated to the Kyoto Protocol. Happy New Year for Green stocks Forget internet and information technology (IT) stocks. Alternative energy companies have skyrocketed since the New Year, as retail investors pile into what they hope is the next growth area. And the swelling market capitalisation of such companies as Plug Power, Ballard Power Systems and Vestas Windsystems (see graph) is bringing the sector to the attention of institutional investors, promising further strong growth, say analysts. "These companies are just coming over the parapet as far as institutional investors are concerned - so far, they've been driven by retail investors," says Bruce Jenkyn-Jones, investment manager at Impax Capital in London. Impax advises on the Copenhagen-listed Almbrand Environmental Technology Fund, which is up 75% on the year by late February. Speedwell to advise Intercapital clients on weather risk UK-based weather consultancy and software firm Speedwell Weather Derivatives has agreed an exclusive co-operation agreement with Intercapital Commodity Swaps (ICS), to advise Intercapital's clients on hedging their weather risks. ICS is a division of Garban Intercapital, one of the world's leading money, securities and commodities brokers. The agreement means Speedwell will not work with rival brokers in the UK and continental Europe and Intercapital will not work with other weather consultants for at least the next two years. No cash changed hands when the deal was signed but the two firms will split any revenues from consultancy work which arises from introductions to clients from ICS, says Rob Preston, director of Speedwell. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE