British Gas signs five-year, £40m weather hedge

British Gas Trading, a subsidiary of UK energy company Centrica, has concluded a £40 million weather hedge with Bermuda-based global insurance firm XL Capital. The multi-year deal may prove to be the largest in Europe this year.

Centrica finalised a five-year, zero-coupon hedge with XL Capital, structured as a “fairly tight” collar, Geariod Lane, head of electricity supplies at Centrica Energy Management Group, told EPRM.

Centrica will pay out if the average daily temperature for any individual month between November and March inclusive falls below a pre-determined level, while XL Capital will pay out should the average temperature rise above another pre-determined level. But Lane refused to divulge these specific levels.

Lane says Centrica had sought such a multi-year deal for the past two years, but the market, until now, had been unable to meet the company’s pricing terms.

Direct use
He adds that while Centrica had considered weather hedging by stripping out elements of other weather-dependent derivatives contracts, the company felt it was cheaper to use the weather markets directly.

No broker intermediary was involved in the deal. Trigger temperatures will be based on those monitored at a meteorological centre at London’s Heathrow Airport.

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