Weather House of the Year: RenRe Energy Advisors Ltd

In the last 12 months, RenRe Energy Advisors Ltd (REAL) has done a lot to expand the geographical and technical boundaries of the weather derivatives markets. By conducting deals across the globe and by increasing the tailored sophistication of the quanto derivatives offered to clients, REAL has secured Energy Risk’s 2010 Weather House of the Year award.

Bespoke weather quanto products are weather-contingent commodity derivatives, and have emerged as the growth sector in weather derivatives. Whereas historically these types of trades would only take place in the US, over 2009 REAL has completed quanto product trades in Europe, South America, the US and Australia.

“In Europe we participated in the UK, Germany, France, the Netherlands and Scandinavia,” says Bill Windle, REAL’s managing director. “There, we’ve done quantos based in natural gas; in Australia we’ve done quantos in electricity; in South America we’ve done quantos in oil products and in the US we’ve done quantos in natural gas, electricity, heating oil and crude oil products.”

The company also completed a vanilla product deal in Japan, and is currently working towards completing a bespoke deal in the country.

“We are working on a weather-contingent crude oil quanto product in Japan right now,” says Windle.

The structure of quanto products can be tailored to each end-user’s requirements, and increased sophistication allows more specifications to be met.

“We haven’t reinvented the wheel per se, we’ve just made it better in refining what the offering is to better meet the exact needs of the client,” says Windle. “As an example, we started out doing products that settled seasonally. We moved to products that settled monthly. We’ve got to the point where the granularity comes down to a single day. We have done sub-hourly granular transactions.”

A typical example of a quanto product would be a heating degree-day contract tied to the price of natural gas. Windle outlines how the increased sophistication has been applied to the market.

“Take, for example, power price spikes that can happen intra-hour. We will provide protection on intra-hour volatility but over an extended period of time,” he says. “We’ll do it through June, July, August. It would settle on a half-hourly price versus an average price for the entire day. The reason that’s important is because it’s the intra-hour volatility people look to manage and not just the average volatility of an entire day.”

Although Windle cannot give exact volume details for the number of bespoke transactions REAL has completed, the company is experiencing solid growth. “We have been successful in offering these types of deals. Year-on-year, we’ve experienced a steady increase in volumes,” he says.

The main challenge ahead for the company is a continuing effort to raise the profile of weather derivative capabilities in risk management for end-users.

“Some products we offer are still the new kids on the block relative to many of the competing products in the market,” says Windle.

“It is incumbent on us to preach the benefits of our types of offerings so that clients are well informed of the range of options available. Communicating and educating about our products may not be a new challenge, but it is a constant one.” says Windle.