Weather risk? Science and business

Published on Monday, 15 October 2018

The impact of meteorological factors is felt not only by renewable energy sources but by the energy sector as a whole. The most direct link is between the trend in temperature and the demand for energy but, in an indirect way, rain and extreme weather events can have effects on the transmission network and the transport of raw materials, in addition to the availability of water for cooling systems. Naturally, the consequences of cloud, wind and rain are particularly relevant for solar, wind and hydroelectric energy production.

Which technological and financial developments can help mitigate the economic risks associated with weather phenomena? The desire to answer this question led our Group to join the Weather Risk Management Association (WRMA), which brings together organisations interested in promoting research and raising public awareness on this issue. The Enel Group is the first, and so far the only, Italian company to belong to the Association.

The risks concern a truly varied collection of productive spheres: from beach and ski tourism to the organisation of large sporting and musical events, to transport. The main sectors involved are, however, energy and agriculture. These, in fact, were the focus of the speakers at the 19th annual European meeting of the WRMA. It was the first to be held in Italy and was hosted by Enel at the company’s headquarters in Rome on 10 and 11 October.

In his opening address, Leonardo Zannella, Enel’s Head of Global Front Office, explained how the huge changes taking place in the energy world, and in particular the spectacular spread of renewables and the deregulation of the markets, are also modifying the risk management scenarios. Zannella went on to explain that our Group, which is present in more than 30 countries in five continents, is facing up to this new state of affairs with a global perspective. It is doing so by developing in-depth analysis with the aim of estimating the Group’s exposure to risk and, even more importantly, identifying the most suitable tools to mitigate it. In the future, our strategy will increasingly focus on this market.

For WRMA President Ralph Renner, the weather risk management sector is also undergoing a profound transformation thanks to technological innovation. On one hand, we are now capable of estimating localised phenomena, such as the extent of rainfall, in addition to more constant factors such as the temperature; on the other, we have developed IT platforms that can process weather data in real time and, based on the results, produce economic analysis too.

Financial compensation for damage from adverse weather events is not a new invention: the first such measures date back to the Code of Hammurabi, which was drawn up 38 centuries ago. What’s new is the quantity of advanced solutions available to us. Renner explained that the agricultural sector is geared prevalently towards insurance products, while derivatives are the best solution for the energy world. And this is the path that Enel is pursuing: weather derivatives.

In general, as Bradley Hoggatt, former President of the WRMA and Chief Portfolio Manager at the MSI Guaranteed Weather company, explained, all of these instruments have as their essential mechanism the action of safeguarding against risk by transferring it to another subject, and are based on indicators elaborated from scientific data: in short, weather risk management is the convergence of science and business. And when it comes to this combination, our Group aims to be at the forefront.