Enel banks on weather derivatives, Machetti tells the newspaper “MF"

Published on Tuesday, 14 August 2018

In the 2017 financial statement, the line item stands at approximately €90 million, but it is destined to grow in the future. Enel has decided to bet on weather derivatives, financial instruments used to hedge against meteorological conditions that influence both energy production and consumption. Enel’s Head of Global Trading, Claudio Machetti, made the announcement in an interview with MF-Milano Finanza, in which he emphasises the potential of this type of derivative. Use of weather derivatives is not yet widespread in Europe, but recent studies predict that companies will increasingly be using these financial instruments in the not too distant future. And Enel will be ready when that happens: “We have gained considerable expertise over time in managing risk as part of an increasingly diversified and integrated portfolio. However, only in the past two years have we been able to extend hedging practices, thanks to our experience gained in the commodities sector, to mitigate the effect of volatile weather conditions on our expected returns.”

Weather derivatives work in the same way as traditional derivatives, but protect corporate results from factors like rain, snow and wind instead of exchange rates, interest rates or the price of raw materials. They are traded on special exchanges such as the CME (Chicago Mercantile Exchange the first to include this type of derivative. As Claudio Machetti explains, Enel began by studying the impact of temperature on client consumption, then looked at the needs of the renewables sector that, by definition, is the most exposed to climate variables. “If you think about a photovoltaic plant, a reduction in the sunlight hitting the panels means losses of earnings for the producers of green energy and, when we consider that weather phenomena like this occur constantly and on a large scale, it is easy to understand how, overall, this is worth millions of Euros.”

However, despite the current panorama, which sees €15 billion traded annually in weather derivatives around the world, only €3 billion are connected to European companies: “Yet the potential target is extremely broad. We’re thinking about renewable producers, but there are also industrial clients and commercial businesses. If you think about a wine producer, for example, and how severe weather can destroy an entire harvest, or ski resorts and what happens when there is no snow for several weeks or too much rain, or beach resorts and the difference a sunny season can make compared to a rainy one.”

Enel is promoting the use of weather derivatives to generate “shared value for us and for all those businesses that until recently were either unaware of the potential of these products or simply did not have the means to use them.” At the same time, it also working to refine management of exposure to climate risks in the different lines of business, in addition to structuring functional products to meet the needs of the client. Furthermore, in the interview with MF, Claudio Machetti talks about looking at the “definition of new advanced weather tools, concentrating on weather forecasts, and the use of their potential benefits in the industrial sector. This is an area where we have already been the recipient of European funds as part of the ‘Horizon 2020’ project, working with academic and meteorological institutions of proven national and international stature.”

The first contracts have already been completed in Italy and Spain to protect the portfolio from the risk of reduced consumption caused by unduly mild winter and summer temperatures. Now Enel is looking to the United States and Chile, with hedging products for production plants exposed to the risk of drought. “We will gradually proceed towards full deployment on a global level,” Claudio Machetti tells MF, emphasising again how these products benefit not only large utility companies that are able to internally compensate their own exposure to weather risks, but also all other industrial businesses. Today, Enel is the only company in Italy that is part of the Weather Risk Management Association (WRMA), which has scheduled a European summit on weather derivatives in Rome from 10 to 12 October.