European energy companies enter market

Channels: Markets

Companies: Endurance Global Weather, Reed Smith, Willis Towers Watson, Meteo Protect, Choice Energy, Speedwell Weather, Aon Benfield

People: Martin Malinow, Claude Brown, Claire Wilkinson, Nicholas Ernst, David Whitehead, Gabriel Gross, Kurt Cripps

Leading weather risk specialists see hedging demand growing from energy companies in Europe and the agriculture sector in the US. Joe Walsh reports.

A warmer than usual winter encouraged European energy companies to hedge their weather risk in a major way over 2016, market specialists say.

"It was a very warm winter in Europe last year so the majority of clients who purchased weather protection last year got paid almost up to the limit of what they bought," says Martin Malinow, president of Endurance Global Weather. The potential for more of the same this winter has led to repeat business as "clients who bought last year have largely bought this year," he adds.

Endurance again made a clean sweep of the Best Dealer/Structured Product Seller category, winning in all four regions covered by the rankings: North America, Europe, Asia and Australia.

It's a view shared by Claude Brown, partner at Reed Smith, voted Best Law Firm globally for the fourth year running. He describes it as the 'hallmark' of the year but explains that it wasn't solely the result of one warm winter, as European energy companies had been considering weather risk management for several years.

"We're seeing new large European energy players come and start purchasing protection who have never been in the market before," says Malinow. Their entrance into the market, as they move from pilot deals to protecting a large proportion of their business, could increase the energy protection market by 50% - 100% over the next couple of years, he predicts.

Claire Wilkinson, managing director of structured risk solutions at Willis Towers Watson (WTW), which shared the title of Best Broker (Europe) with Meteo Protect, agrees.

"2015/16 was a very warm winter in Europe, so many of the capacity providers paid out large claims. This may have an impact on both supply and demand and ultimately on the price for warm winter protection," she says.

Claire Wilkinson, Willis Towers WatsonBut the warm winter was not the sole reason for European energy companies increasing their weather hedging significantly. As these companies add more renewables to their generation capacity, their businesses become more exposed to the weather.

"European energy companies entering the market has been driven by warm winters there as well as the build out of solar and wind installations, so now you have a larger share of the energy stack coming from intermittent weather driven sources," says Malinow.

Despite this, the growing influence of renewables on the weather market has not yet happened to the extent expected, as the industry still faces some hurdles, according to Nicholas Ernst, director of weather markets at Choice Energy.

Houston-based Choice took the title of Best Broker for Weather Risk Management in North America for the first time.

"Take off of renewables has not yet happened... I think everyone expects that it will, but it's not happened as quickly as people hoped," agrees Wilkinson.

Claude Brown at Reed Smith also feels renewables have not had as much impact on the market as had been expected.

"There is a growing interest in the wind market, and to a lesser extent solar. In Europe, wind is leading solar, so there is a trickle through effect, but it's just lagging," he said.
However, industry players remain confident that there will be an uptick in hedging interest from renewables facilities further down the line as the industry continues to grow.

"We're working with a number of companies in the renewables sector and have expectations that there will be more activity in coming years," says Wilkinson.

But not everyone is convinced renewables have been slow to join the market. David Whitehead, co-chief executive officer at Speedwell Weather, which retained the title of Best Advisory/Data Service (Global), says the sector is showing interest in its weather data.

"We are not seeing a lack of renewables business. As we understand it, there's a lot of hedging being done. We've seen the demand and we've gone ahead and created a 'gridded' wind data set and that's obviously for wind farms," he says.

Gridded data is based on a combination of satellite readings, 'reanalysis data' from processed historical data and some actual production data from operating assets.

One reason why brokers aren't seeing as much activity from renewables as some expected could be the difficulty in pricing the industry's weather risk. It has more variables to consider that are harder to predict over the long term, such as wind strength and the amount of time it's blowing, or temperature combined with cloud cover.

"When looking at pricing these renewables deals, they're not quite as easy as temperature, but I have a feeling that within the next year or two people will come up with different ways of overcoming those difficulties," says Ernst.

One company trying to come up with innovative solutions to overcome market difficulties is Meteo Protect, which shared the title of Best Broker (Europe) with WTW. The Paris-based broker, founded in 2011, claims to have the largest team in Europe focussed solely on weather risk management.

"Clients are more and more demanding; they want more refined structures, as bespoke as possible and the complexity of what we do is increasing. It is only limited by our own speed to come up with new innovations," says CEO Gabriel Gross.

One area of innovation attracting particular focus in 2016 was the increasing use of data and expansion into new geographies, with WTW noting that the use of satellite data has enabled new trades to come to market. This is particularly true in Africa, where the transactions it structures are reliant on satellite data.

"Take off of renewables has not yet happened...
I think everyone expects that it will, but it's not happened as quickly as people hoped" Claire Wilkinson, Willis Towers Watson

"Satellites are allowing customers to create solutions for parts of the world where there's perhaps a lack of data," says WTW's Wilkinson.

Meanwhile Speedwell has launched weatherXchange, "a free-of-charge platform which allows clients to access weather data, structuring tools and access to pricing from multiple protection sellers," with help from Reed Smith.

"A big trend would be the use of gridded data sets, that's definitely the catchword of the year. We've even launched a whole new product line for it," confirms Whitehead.

This greater push for innovation and bespoke products is not seen as universally beneficial and will hinder the ability to trade hedges on the open market, according to Ernst at Choice Energy.

"In doing that, I think we lose some of the standardisation of getting rid of risk," he says, although he does agree it is a great thing for clients, as it is that side of the business that is driving innovation.

Another trend in 2016 was a greater push for diversification of end-users in the weather market, with industry experts reporting that transportation, construction, and particularly agriculture in the US, have potential for growth. "With 88% of businesses' profitability impacted by the weather, firms are beginning to recognise how bespoke insurance cover can protect their bottom lines," says Kurt Cripps, managing director at Aon Benfield, voted Best Broker (Asia) for the first time.

Energy remains the largest sector for weather hedging in North America, but 2016 saw a continuation of the previous year's trend of growing interest from American agriculture companies. WTW says it's where it is most active and Endurance forecasts tremendous growth, potentially becoming its primary focus in the coming years.

"We've tried to concentrate on the agricultural side of the market. I see that sector growing even more," adds Choice's Ernst. Relative newcomers Meteo Protect says two thirds of its business already comes from the agriculture sector.

WEATHER RISK
WEATHER RISK NORTH AMERICA
 WinnerRunner up
Best Broker Choice Energy Evolution Markets
Best Dealer/Structured Product Seller Endurance Global Weather Nephila Capital
WEATHER RISK EUROPE
 WinnerRunner up
Best Broker =Meteo Protect; =Willis Towers Wason  
Best Dealer/Structured Product Seller Endurance Global Weather Nephila Capital
WEATHER RISK ASIA
 WinnerRunner up
Best Broker Aon Benfield CQ Partners
Best Dealer/Structured Product Seller Endurance Global Weather Swiss Re
WEATHER RISK AUSTRALIA
 WinnerRunner up
Best Broker CQ Partners  
Best Dealer/Structured Product Seller Endurance Global Weather Nephila Capital
WEATHER RISK GLOBAL
 WinnerRunner up
Best Advisory/Data Service Speedwell Weather  
Best Law Firm Reed Smith