Liffe said it has focused on average temperature rather than the usual heating degree/cooling degree days format, as it believes that average temperature has the benefit of consistency all year round. As a result Liffe said its indexes will remain relevant not only to the energy industry, but also to a wide range of other market sectors.
“We expect participants in the energy sector to be particularly attracted to these contracts. However, the unpredictability of weather impacts on many diverse sectors, including insurance and agriculture as well as the manufacturers and retailers of everything from soft drinks to cold remedies, and those involved in the organisation and provision of everything from pop festivals to package holidays. Over time this suite of contracts will grow to offer effective hedging of weather risk on a global basis,” said Ian Dudden, Liffe’s director of non-financial products.
Stuart Jones, business development manager for weather risk at Accord Energy, the trading subsidiary of UK energy company Centrica, said Accord would actively participate in the Liffe weather market.
Meanwhile, Japan’s Kansai Electric Power Company (Kepco) and Osaka Gas Company plan to structure an innovative deal where they share out profits from excessive weather variations to ensure more consistency in earnings. Effectively excess Kepco profits in hot summers - which see an increased need for air conditioning - will be shared with Osaka Gas, which usually sees lower gas demand when temperatures are high. The two companies will do the opposite in cool summers.