Trading the weather: Inside energy’s new derivatives market with Theresa Kammel & Pierre Buisson (Munich Re)

Hello. I'm Ed Porter, VP of Insights at Modo Energy, and you're listening to Transmission, the podcast that's obsessed with the business of clean energy, which in today's world increasingly means the business of weather. Weather has always been part of the conversation in energy. Perhaps got it on the long range forecasts for the coldest winter in years, but it's now starting to take a central role as the grid changes.

In a grid built on wind, sun, and water, weather isn't just context, it's the input. It dictates how much power gets generated and increasingly what that power is worth. A calm winter can crush wind output. A dull summer can flatten solar revenues.

Too much wind or sun can send prices through the floor just as too little can send them soaring. For batteries, fleets aren't worried about very high or low wind, but the boring middle ground tends to hit revenues. In the old energy system, weather influences demand. In the new system, weather hits both generation and demand closely followed by prices.

Today's guests are Theresa and Pierre from Munich Re. Theresa works with energy companies facing volatility head on, utilities, traders, battery owners, renewable portfolios, she helps them define the risk they actually carry. Pierre then turns that risk into something concrete, a structure, an index, a payout that triggers when the weather doesn't cooperate. In short, weather derivatives.

But this isn't simply a trading mechanism, and it's not just about smoothing profits. Lenders and investors care.

When revenues swing wildly with the weather, projects are hardest finance and more expensive to build.

Ultimately, hedging weather isn't just for wholesale markets. It's increasingly for financiers who don't want a project's debt service hinging on whether the wind shows up.

And this greater revenue certainty, despite weather's inherent unpredictability, tends to mean cheaper capital, which means more projects get built. And this episode is about that shift. How weather behaves as a balance sheet risk and how finance is adapting so that the system can keep scaling even when the forecast doesn't cooperate.

Welcome back to transmission.

Theresa, Pierre, welcome to transmission.

Thank you so much for having us. It's a pleasure being here in London with you today.

Yeah. Thank you so much. So happy to be here.

And for our and for people who are listening in, we've obviously got two guests in today, so you're in for double the amount of content. And as ever, let's start off with, introducing yourself. So, Theresa, can I come to you first? Would you like to introduce yourself to our listeners?

Yes. I am a weather derivative originator with Munigree. Probably, you listeners haven't heard about weather derivatives that much.

So I take care of our clients across Europe and Asia in the energy space who want to protect themselves against weather deviations.

Okay.

Pierre? Yeah. So, Pierre, I'm working with Theresa. Same team, so doing weather, trading, but I'm more on the structuring aspects, so really kind of more the modeling of the underlying financial product. So I'm in that industry for three to four years after kind of a whole career in the energy sector. So I moved basically to the WES Assign now since a few years.

Okay. And let's just get straight into that first piece. Right? So, Theresa, coming to you, like, what is a weather derivative?

It's basically a structured product on an underlying weather index.

So you would use that product if you want to receive a payout in case the weather is not doing what you want. So whether your temperature is, like, too mild or too cold And then you can structure a derivative on top of that.

Okay. So let's let's make that real for people because I think whenever we start talking about origination and structured products, people kinda go, oh my god. I don't understand what the hell's going on.

No. And that's a good point because, it's such a niche market, and it's all or the majority is done on OTC, so just between businesses. So it's all very hidden.

OTC means?

Over the counter. So directly between you and me.

Okay. So two parties just kinda trading bilaterally.

Exactly. Okay. Sometimes there could be a broker in the middle, but usually, we just speak directly to the traders, to the portfolio managers.

Okay.

So let's take a use case. Very easy example. If the winter is very cold, you and I will put up the heating. So we'll use more energy, and the gas company that is providing this energy might have to source more of it in the market because they might have underestimated what they need. In those cases, they are happy if they have a weather hedge in place that will pay them in case the temperature is dropping between below x degrees.

Okay. So let's so so just taking one party here, we're looking at someone who's providing gas, to customers. They expect to provide a hundred units of gas, but if actually two hundred units of gas are needed, that extra hundred is gonna be more expensive. And so all of a sudden, they think they might make a loss.

And so they are exposed to what that what the temperature is effectively. And so they might say, well, look. I've got this exposure to temperature, and they come to you and say, okay. I I like how do I fix this?

So how would you how would you help them?

Let's assume it's a UK utility, and they say they have their end customers all over the UK. So they would try and find a weather index, let's say, a weather station in London Heathrow because that has been running for a long, long time and has been a relay reliable measurement of the temperature there. So they would take that weather station, look at the historical weather data, and look what is the normal temperature. How does the weather behave there on a normal winter day over the year or over the season? And then they would try to estimate what their exposure is for the weather deviation, put a number on that, and then come to us and ask, can we pass that risk off to you?

And we'll do the same exercise, agree on a price, and then the season rolls in. We observe the weather. And at the end of the season, we calculate the payout, how much we would pay that company.

The the really, the idea for those companies is to make sure that, kind of, if the weather turn adverse to them, basically, they have that safety line, and they can still stick to the plan. So they say, okay. We can we bring, basically, the activity back to normal situation. If actually kind of the weather is in their favor, it is possible that basically kind of in that case, I mean, they would have made extra revenues compared to that normal situation. So in that case, they would have been happy to either pay the premium for the structure or if it would have been more like kind of a swap product. So bit kind of where basically we pay on one side and we collect on the other, basically, we'd be happy to pay us. So it's really kind of for them, really kind of reducing the risk and kind of basically narrowing the uncertainty around basically what's the plan.

Because they want to talk to their financier and say, I'm gonna make two percent. And they don't want to have to come back and say, oh, sorry. This year I made five and this year I made minus one. They want to be able to come back and say it's two percent.

That's gonna be the number. So the more of the risk they can get rid of, the better. I'd love to come back to that point around whether it's a swap or whether it's a premium. So would you like to describe those those structures just a little bit more?

Yeah.

So it's really kind of I mean, maybe one thing is important is that what's derivative can be seen as Lego bricks.

You can really just build whatever you want. So that's why we call them structured product. But usually, you know, on on that, you usually have, let's say, typical standard financial products. So people trade options. So let's say, call options, meaning, you know, if the underlying weather index is high, basically, we'll pay them. And if it's low, nothing happens. They just pay a fixed amount for just getting that default protection.

So so so just pausing there. So they pay a premium The payoff. For the option Yes.

And if it goes high Yes.

Then they get paid out. But if it stays low, they've essentially paid to derisk, but the thing hasn't happened. So Yeah. They're they're happy anyway.

Yeah. That's exactly how it works. So we can do structured and call options, meaning that kind of we pay in the underlying index, which is high value or put options on the other directions. But we can also do swaps, which is similar to, let's say, trading futures, meaning kind of we agree on a, let's say, fair level for the transaction.

If, for example, temperatures are warmer than that level, we will pay them. If it's colder, so then maybe enough, they will pay us. So it's really enough there is no premium paid upfront. It's really more like kind of a win win situation because they know kind of either we'll pay them when they need or they will pay us when usually they're making extra money from their own the other activities.

Okay.

We can be very creative around that. That's a little tons of structure, but you these are the most common product, and usually they match ninety nine percent of the needs on the market.

And when we talk about temperature, is it really sort of like the average temperature for this winter was five degrees, or do you work in a different unit? So do do you sort of track how many days that were colder than expected or how many days were warmer than expected?

So often, we would, accumulate the temperatures, for example, on a daily basis over the months and then define that level on the cumulative values.

In gas trading, you would also have HDDs, so the heating degree days, which is the temperature minus, like, a level when people tend to switch on the heating. That could be eighteen degrees or sixteen degrees, however you define it. In the UK, you have more the CWV, like another index trying to represent that.

And we are flexible on what you want to use an as an underlier. You just like, we make sure that it actually fits what you want to.

Yeah. So the the real basic here is that you're trying to find something that really matches when people will turn on their heating. And let let let's say we're doing the retailer example. So you're trying to find something that really matches that so that the product they can buy from you really helps them get rid of that risk.

That's that's the core of this.

Know that. They really know they have usually their own demand model, so they really know how temperature translate in in demand. So they know how many how much one degree will impact their gas consumption, so how much the amount of gas they will sell to the customers. They know that.

Okay.

All those big players, those big enough gas utilities, and we very likely will touch later on kind of which other industries are doing the same, they know exactly kind of to they know how to quantify that risk. But then kind of the big names, they know how to transfer that risk. Some people still don't know that, but some people just say, okay. What do I do with that risk? But they need to know that kind of it exists a system to basically transfer that risk that actually you do not actually kind of take the risk of going into delivery with that uncertainty. But usually people know how to quantify it.

Okay. And this is this is the classic case for weather derivatives. Let's now take that a a step further. So is this expanding to new clients? Is this expanding to people like wind generation? Theresa, come to you for that.

Yes. The answer is absolutely. It started in the beginning as you just touched upon in the gas industry because there on the demand side, it's obvious that use case. Weather is driving the demand behavior on the customer side.

Now with the change of the landscape with more and more renewables, that weather impact is now also seen on the supply side. If the wind's not blowing, there is no wind generation power. If there's more clouds in the sky, there is less solar generation. And then, of course, hydro, which is all of often the, like, sleeping giant, people tend to forget about about it.

That's also, like, a big driver.

Okay. Maybe just to put a bit, you know, because we mentioned temperature, to put that into perspective, I mean, weather derivative exists since about two decades. So it's not with temperature. Like, you know, it's been two decades that people are trading kind of basically degrees all over the world.

Since maybe one decade, a bit less than that, kind of wind has been massively growing. So now it's basically kind of almost as big as temperature in terms of total risk, particularly in Europe. So it's very, very important because also the financial amounts are gigantic. I mean, everybody, I mean, in that industry and maybe not all your listeners, but they kind of they realized that kind of last q one, so q one twenty twenty five, we had kind of one of the most severe wind drought in Europe that we have never seen. So, basically, at that moment, over the first quarter of twenty twenty five, wind was about, depending on the European countries, twenty to thirty percent lower than kind of the average, the the normal level here. If you take a country like Germany, you multiply that missing wind by the price of electricity on the wholesale market, you reach about a a missed opportunity or cost for the system of about one point six billion.

So that's a gigantic market. So nowadays, we have wind being almost as important as temperature. And, I mean, as Theresa mentioned, hydro is a bit of sleeping giant here that kind of people tend to forget even if it's also something big. Now solar is also kind of catching up. So even if there is a bit less uncertainty on the weather, just to find that there is more and more PV panels everywhere, the impact of of a sunny year or a sunny period versus a non sunny period has a massive impact. So we see also that kind of that things moving.

And now also renewable energies and weather is the main price driver on the wholesome energy market.

So let's just make this a bit more real for listening. So you used to track sort of temperatures at Heathrow. Right?

But now you need to track, I'm guessing, wind speeds Yes.

In different parts of, say, the North Sea or wherever that sort of wind is.

Professional data providers.

Okay.

Whether it's the Met offices in the various countries or then third party data companies that would, like, collect the data and provide it to players like us in the energy company.

So that's being provided to you. You're getting in the that those wind speeds. You're also getting in solar data. So, like, how much irradiation there is, like how much sunshine there is at like individual parts of the country.

Is that also being fed to you as well? Yeah. Yeah. And then and then and then for hydro, I guess you're talking about like run of river hydro.

So you're thinking about how much rain there's been. Is that is that fair?

Yeah. That's that's fair. So you would have run of river assets exactly. You know, we can look at precipitation.

You also have sometimes kind of measurements on some key rivers about stream flows. I mean, usually, kind of, we monitor quite well those rivers in Europe for just flood monitoring, kind of for different type of for usages. So usually, we have good data there. But even reservoirs can kind of play a role because you may wanna see, okay, avoid a certain period of time, what is my cumulative precipitation in that area?

Because, I mean, the amount of snow in the winter and the precipitation maybe in spring and summer will tell you how much kind of what's the energy potential that you have in those reservoirs. So really kind of now I think in a big share, maybe sixty or seventy percent of the energy system is weather dependent. So we always have the measurement for any type of asset and any type of, production means.

And maybe let me add here Yeah.

Just to clarify, we have the direct impact just on the volumetric side. Like, how much demand there is impacted by the weather or how much, like, supply, wind generation, solar generation. But then you also have the secondary impact of the renewable supply driving the prices.

So it's, I think, helpful to just think along those two dimensions.

Let's just sort of stay on that for a second. So maybe let's take the example of of the wind drought that we've most recently had. The first question is was that good or bad news for you? I'm not sure.

Maybe one thing is important is that kind of we are there as part of reinsurance company to take those risks. So, I mean, of course, when you have these type of years, depending a bit on how our clients are being positioned and what type of protection they ask for us, we can be very exposed by those type of events. But we are also there to help. So we are not measuring ourself unless it does type of special event, but we are just trying to diversify our activity.

We had an office we have a office in Houston to take care of the US business and Latin American business. In our Zurich office where we are both based, take care of the European business and the Asian business. So we really diversify the things. So a wind drought in Europe, we are there to help our customers.

We can help them, and we just basically kind of diversify sufficiently our portfolio between periods, between geographies so that actually kind of, you know, we can cope with those events. We also attach a reinsurance company, and we are diversifying also that reinsurance company. So we can take those type of risks. So we are happy to help when it needs when we need to help.

So we don't really care if it's a good news or bad news for us. I mean, of course, maybe we have a bias in our job that we check a bit more the wiser.

Always make money.

Yeah. But, yeah, we want also people to we want to be helpful, and we're happy when we are helpful to the clients.

And, you know, those products are structured in a way that they are meant to pay out on a somewhat regular basis. Yeah. Not like just one in a hundred events, but, I don't know, One in five, maybe.

One in four, depending on Yeah.

Of course.

You need.

Of course. People people don't want to have a product which sort of isn't isn't sort of designed to pay out. Right? The the purpose of this is that that, as you're saying, somebody should be able to allocate their risk to you and should be able to run their business more efficiently because you're set up to hold the risk, and they can get on with the things that they can control within their business, which might be the billing or the o and m for the wind site. You know, they shouldn't be sweating about whether wind speeds are up or down this year.

Yeah.

And it's also, I mean, very important for us that, you know, we help people to see that, you they can hedge a big part of the operational risk.

So they know they can be confident in saying, okay. If I want to invest in renewable energy, that solution exists.

I don't take any risk for my business if I have to face a really bad weather year. Yeah. And it's very important for us that we are there to be supportive also kind of in the context of an energy transition, changing energy markets, markets being more and more western dependent because, yeah, we want to help people to just be able to kind of have sustainable business in that environment.

And I think this is a really good point, and Theresa links back into yours, right, which is that if you go back ten, fifteen years, everything was very much based around gas or coal. And so, yes, there was kind of thermal generation. It was very sort of temperature driven. Now in a world where solar is a huge part of this, wind speeds are a huge part of this, hydro is a huge part of this, And then we're also sort of still layering layering on those temperature days. You can see how the whole energy or electricity industry is looking to sort of find a place to put these risks so they can get on with the stuff that they really want to do. So as the transition happens, it feels like this is such a critical part of allowing people to derisk.

Have I have I kind of Yeah.

No. Absolutely. And we are there to help the clients in the energy space to navigate this volatility.

Okay. And let's take this one step further. So we've kind of done the original product, then we did something slightly more, complex in terms of wind. Now let's go one step further and let's talk about how traders or perhaps battery optimizers might use a product like this. Pierre, maybe I can come to you. Yeah.

Sure. I mean, the it's a very interesting question and I think it's you may have different types also of profile even, let's say, within the trading industry to start with You may have a a trader bank kind of linked to an asset, so they're trying to trade around the asset. So they need to sell the energy. So at the end, you may wanna say, okay.

I basically if I have a wind farm, then I want to start selling my production, then I don't want to be exposed that in delivery if there is kind of too little wind or too high wind, I need to just close the position. So they would actually trade whether product to actually kind of hedge the type of risk. So maybe within the year, on a regular basis, they will come and say, okay. I want to have a low wind protection for q one or a high wind protection for q two.

It can vary a lot. So you would have this type of traders. Then you may have more speculative traders or actually traders which are more which who are not concerned by the volume parts. So they do not necessarily have a volume exposure as such, but they are exposed to prices.

So they know that, for example, kind of, okay, next week, if there is very little wind in Germany, it's quite likely that actually power prices will go up to the roof. I mean, we had the case kind of late November. I think it was on the twenty fifth of November that kind of actually prices in Germany, for example, reached kind of four hundred euros almost all day long. That was a low renewable output day.

I mean, kind of, if you have this repetition kind of over multiple days in a month, for example, that can have a big impact on your business case. So, I mean, there's always I think it was Einstein thinking of god doesn't play dice. I mean, kind of it's a bit the same. You don't want, do you want to play the weather dice?

So people don't want to do that. So they they do a lot of analysis. They have a price exposure, and they will say, okay. I should be fine unless the weather turns that way.

So then they would hedge that type of thing. So that's really for the trading environment.

I'm just gonna pause there for a second because you say they don't want to play with the weather dice, but they're passing the weather dice onto you.

Right? So you're playing with the weather dice. So how how I we've we've talked about this a little bit before, but it would really trying to get to the point now that that you you're sort of establishing yourself as people who are very much set up to hold that weather risk. That's really the sort of core message of all of this. Right?

Yeah. Because we will be there to accumulate that risk, to manage it, to just look at the diversification we can get, and we are just a professional. We have dedicated capital. It's exactly like an it can be like an insurance product.

I mean, kind of you do not want to take any risk on your personal level, but you're happy to just transfer that risk to a corporate, which is, you know, professional in managing that risk. So that's what we people will be doing with with us. And we would actually kind of be equipped to actually aggregate all that risk globally to look at kind of different types of peril, to have other part of risk, you know, Munich Re portfolio that we can actually manage that one. So for us, we don't see that as a kind of we don't play dice.

We just go to the casino with that. We just know that kind of we can control it because we are professional. We know how to handle that risk. While maybe kind of on the other side, it can be someone being so focused on a specific market and specific risk that for him, it will just be a binary risk.

While for us, by doing that aggregation, we can manage it.

Okay. And then moving on from sort of the the traders, as you say, who might hold sort of volume of price risk. How would a how would a battery think about this?

It's very interesting trend, and I think it's one of the it will be one of the most exciting challenge for the next few years.

We are in a massive energy transition. We have markets. I can take the example of Spain that kind of there is a crazy number of hours where prices power prices are is at zero.

Each time there's a bit of solar in Spain, kind of and there's a bit of wind, prices fall down to zero. So you may have a lot of opportunity for batteries owners to say it's very easy because I can charge my battery when prices are being low, and I can basically these shoppers are very high.

What's the main driver for those for that spread? It's usually basically the scarcity of the renewables. If you have within a day hours with very high renewable outputs and hours with very low renewable outputs, your batteries will be very interesting and you can profit from that. So you will do one, two cycles per day in those cases. If you would have, let's say, a boring rest of day in a sense, like, of wind and solar and maybe kind of also your run off river, it's quite high. Everything is a bit healthy, but it's relatively flattish. It'd be very difficult kind of if you are active with a battery on a day ahead market to really kind of start being kind of to make some money there to actually justify your cycle.

Some people will say you can always be active on balancing market and the intraday market and things. That's very true. But if you think about very large penetration of batteries, those batteries, they will also have to operate on the day ahead market, but it will be a very big important source of revenues for them. So the weather volatility within a day or within a certain sub period, maybe kind of two days or something like that, will be the driver. How many cycles you will be able to make with your battery be fully dependent on the weather volatility. Yeah. And I think this is how people I mean, this is how people at the moment at looking at weather hedging or weather derivative as a support tool for batteries.

Okay. I think I have lots of questions on this.

And let's I was potentially thinking to save them for later, but I I think let's let's definitely jump into this around the sort of balance between wholesale markets. So the way that people would usually trade their energy and the ability to use weather derivatives.

So traditionally, I think most people would say, well, how do you mitigate your risks in the wholesale market? Well, you just take a decision. So you you you buy or sell the energy and you try to sort of get that risk off your book in that way.

It sounds to me like that process of managing risk, you could almost do a big chunk of that with with weather derivatives. So if if I'm a battery owner, when should I manage my risk through the wholesale market and when should I manage my risk through the the weather derivatives market?

It's a very good question. I'm not sure if actually kind of you would have you can ask multiple people in the market, you would get very different answer. They will have all different very different opinion. I think it's a bit dependent on your price risk appetite.

Okay.

Some people may actually want, okay, I want to do only a portion with the weather risk with the weather derivative because kind of what you would usually do with, let's say, pure weather structure is that kind of you will get kind of let's say, you have a, for let's say, a bad weather day, so a day where actually the volatility is very low on the renewable side, you will basically receive a fixed amount of money. So you will secure your revenues. Those revenues, they won't necessarily be proportional to actually power prices. They won't be proportional to energy prices.

So is it a problem or not for you? Maybe in your business case, you'll be very happy to secure that price for those days at a certain fixed level. Some people, they may want to say, actually, kind of, I like that approach. I think I like that safety line, but I would still like to be able to kind of in case energy markets go to kind of, I don't know, go to the roof, I would like to still be able to kind of get something a bit more proportional to the To spot prices.

So then they would actually decide, do I do, I don't know, twenty percent, fifty percent, seventy percent of derivative, and then I do the rest on the spot market. So it depends a bit on the risk appetite. And usually, I don't think people should go black and white here. They should just think about what is the proportion, and they need to decide kind of, okay, what do they do?

They can always reevaluate along the course of the of the lifetime of the asset.

Yeah. So if we if we stay in Spain for example, I think the thing you're saying here is that the weather derivatives offer some more flexibility, but they don't always reflect the energy trading outcome. And so for example, you could have two days in Spain, both of which have slightly lower solar generation than usual. And on one day, there could be really good hydro reserves, and on another day, there could be really bad hydro reserves.

And although both have, like, lower solar than usual and therefore would sort of activate the weather derivative, the power price outcome in those two scenarios would be very different. Yeah. And so you're saying, well, like, I want to I want to hedge that risk that exists in the market. If I just use the weather derivative, it doesn't always match with exactly what happens on on the power prices. So you're saying maybe a blend is kind of the way that some people think about it.

And maybe also one important thing, I mean, you're perfectly right. A blend is, I think, the right tool, and that's what we see also from the discussion that resonates with the client. You know, there's always a lot of thinking and kind of what strategy they need to take. They discussed a lot with us. And in our team, I mean, kind of I mean, half of the team is coming actually from the energy trading world, they actually can be good sparring partner with the with the clients, trying to discuss with them, thinking about kind of what is the best the best setup here.

I mean, in terms of products, usually, the tenors for those product would basically cover, let's say, kind of one month to maybe kind of one quarter, one season, maybe one year, maybe a few years. That will be a bit general length of the contract. So usually people also they tend to use those words in a bit of a on a regular basis. So we'll just come back to us on a regular basis.

Okay. Hey. I want to hedge this quarter, this the coming season, maybe the next year. So they were also always trying to kind of readjust a bit kind of the the magnitude of the weather derivative hedge that they want, so how much they want to be paid per weather index unit.

So then they never really fully disconnect also from the energy market. So they they really try to always take enough to work alongside the wholesale market. Okay.

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Enjoy the conversation.

I'd like to bring us back to a more sort of general overview of the sort of derivative space and talk about just the size of this market. So I think people are getting a sort of a concept of how it works and how it can be sort of beyond just sort of certain types of weather day and and now going into wind and now going to battery storage and going to trading desks. But let's just talk about how big this is. So are we talking about a market that is sort of settling millions per year? Are we talking billions? Are we talking tens of billions? Theresa, how how big is this?

So even though it's only twenty years old, this market, it's now in the billions and quite active. It's all hidden being OTC, but there's a weather transaction happening probably every day, sometimes even more than that.

And those and those transactions, how so Pierre has mentioned they they can be quite specific. Does it generally tend to be on a specific day across seasons? Do people go out to sort of the ten year tenor? What what what do you see?

So the majority is just in, like, the next year, whether it's over the next few months, the next winter season. But increasingly, especially with the renewables, there is more focus also on the longer terms.

And interestingly, this is coming more from the financing side.

Okay.

Because imagine if you have to give money for a wind farm to be built up, and then there is a few low wind years, and the wind farm is actually struggling to pay you back. And now after a few years of the subsidies, like, slowly phasing out, the, financing companies are actually realizing that they are exposed to that and increasingly demanding weather hedges to be in place.

Maybe that market is super interesting also from that is that you can have one day, you can be working with a client, on a structure, and you're discussing that for a few months to really kind of have something which is very structuring. Let's say, can be multiyear. It can be something from their retail portfolio. They do it for one full year for the whole so you have a lot of iterations of the client.

You discuss a lot with them. And sometimes you would have a client that's, okay. I have a position. I need to hedge it right now.

And kind of within one hour, then kind of the structure is closed and the the trade took place. So it's really dynamic. It's really different. It adapts really to also the type of the client.

So we have period where it's more like kind of planning wise, so a bit more kind of longer process, And sometimes it's something which is at the end kind of very quick because it's really kind of an urgent need on the market. But maybe one thing to mention is that at the end, because it's based on, let's say, measured weather element, then once they take enough the settlement took place, there is always kind of a very quick payment after that. So within a few days, basically, the money is transferred. So it's also something very convenient because you can execute if you need very quickly, and then it's also something that kind of just at the end of the risk period, a few days later, money is there for your bank account in case you need it.

So it can be a very dynamic. That's why also sometimes we have multiple trades taking place within a day.

Yeah. Okay. I have a a very serious and then a very not serious question to ask you on as as a follow-up to that. Maybe, Theresa, picking up with your the the trend on financing.

Right? So somebody puts billions of pounds into a wind farm and you're saying that one of the things that they're now starting to recognize is that in the first few years, the wind might not turn up. And so they're saying, please operator, could you or the asset owner, could you go and get could you pay a premium to a third party so that if the wind doesn't turn up, you're still making I thought you were gonna make ten pounds and I would like you to still make something close to ten pounds and not come to me and say, oh, sorry. The wind wasn't very good this year, so it's gonna be six pounds.

So you're saying that we're now starting to see that much more in financing transactions?

Exactly.

Okay.

And then you have, like, structures five years out, ten years out in the future just to secure that level.

And that that, I mean, that that is sort of the tenor we are seeing. Right? And what we're now seeing a little bit more in places like GB is that the the way that we finance or the way that we support wind projects has gone from being a fifteen year contract to now being a potential twenty year contract. So have you started to see things coming through for twenty year terms?

Yes. There's clients reaching out. We haven't closed the twenty year structure yet, but Okay.

I'm sure that How do you get, this isn't my silly question.

My my silly question is still coming. But how do you get confidence in what the weather's gonna do in twenty years' time? Surely you're surely, like, the modeling, right, is is all around, like, the weather conditions today and sort of what we see in up until this point. And with climate change and with with weather changing, how do you know what it's gonna be like in twenty forty six?

It's a it's a really interesting question there. So first of all, I mean, kind of, I think the majority of the structure will be way shorter term, then actually you can rely a bit more on that. There's also a bit of a particularly for for wind and maybe solar, for example. I mean, kind of you may have some trends in the data, but it's not as pronounced as maybe kind of what we are seeing kind of on on temperature due to climate change.

So really something kind of where you can get some type of confidence there. Of course, when you're reaching kind of, let's say, those long term contract, you would have different type of mechanism. What is also very important is that you may also want to have something that at the end would just be reevaluated a bit along the line because kind of I mean, the question that you ask is a very valid questions, but also a question that can apply on the other side. So they want to say, okay.

Kind of how can I want to be sure that kind of that's a fair level? So we then find mechanism to try to kind of address that specific point.

And just one question for the client is often, like, how much other installed capacity is there? Will that impact me on the volume side or on the rather on the price side, not the volume side?

Okay. So I see I see I see what you're saying.

So you're saying that market might be changing over the next twenty years.

So I think what a lot of the clients who are looking at the longer structures, let's say, ten years, they would then try to build in an option that they could adjust the structure as they go along.

This is a really good point. So listeners remember, I I was just talking about Spain and how in some days if you have less solar than you expect, some days you might have a really high price and some days you might have a sort of lower price. So the the the movement of of how much sunshine there is doesn't necessarily mean what the you know, doesn't necessarily dictate what the price will do. I think what you're saying there is that in today, we might have one gigawatt of wind in that particular location. But let's imagine a future where we've got twenty gigawatts of wind in that location, then the the reaction of the price to there being more or less wind will be much more severe. And so yeah. And so that's that's why they want this option to to be to be able to tweak something.

Yeah.

And with all the batteries coming in, you don't know what environment you'll be in Okay.

In ten years' time.

So know the price regime, so would say, kind of, it's always better to start kind of rolling a bit this type of product along the line in a recurring basis, then you can always readjust to in which price environment are you? Which are the new possibility technologies happening? How your power mix change? Was there any kind of substantial impact?

It can be a change in the policy. So it's it's always better, I mean, at least from my perspective, and this is what we see also from our client who's actually use what's derivative as a recurring business. And, usually, we have kind of all clients. They are with them for a long period of time.

They come back every year. They always adjust the structure. They readapt to their portfolio, to changing in market conditions, and they tend to renew those things. That's a bit what we see as a bit of the norm in that market.

I really like the phrase you used earlier around, like, sparring partner. It feels maybe a bit combative. Right? But but, like, it's I get the sense from these conversations that there's very much like a two way conversation, and you are tweaking things to match their risk profile that they want.

Yeah. And in the end, we try to find the ideal solution that fits both clients and us.

Okay. Let me get on to my silly question because otherwise, I'm I'm I'm never gonna squeeze it in. You must have people in the office who are getting married on, like, the fifteenth of May next year who go, like, oh, look. I just want it to be a sunny day.

Like, could they come to you? Could they come and they say, look. Like, if it's not sunny on that day, can I get a thousand pound payout? Because, you know, that's gonna that's gonna offset the the risk of rain on my on on my wedding day.

Depends how much they're willing to pay.

Okay. Okay. It is not to negotiate. Okay. Very good. Very good.

Maybe just just to add on top of that and also to add. I think it's a it's a very interesting questions, and we have sometimes some requests for these type of activities.

Usually So that would be rock concerts, fashion shows.

Yeah. Yes. Oh, okay. So, like, you do actually sorry. I I like I still this silly question.

Getting our team doing that.

Yes. Okay.

We are more around kind of, let's say, more longer term period deals because I'm more kind of, okay. We don't want to see, okay, what is a bit kind of was it was the winter too cold, too warm? Was it kind of too windy, not windy enough on a specific month? So let's say something, 's a very special in a single day, that's a bit kind of, let's say, less in the in the norm of the world of positive derivative even if that's something that kind of is happening and we do on a regular basis, but that's a bit more like enough.

It would be more for, like, enough a big group organizing. I don't know. In your case, kind of one organization the team organizing the weddings to say, okay. I have this list of recurring weddings, kind of I want to actually kind of almost hedge all those weddings I have over the maybe the summer season.

That would be more the type of risk that we'll be happy to take than, let's say, one specific single wedding.

Okay. But if somebody said, I'm gonna organize a tennis tournament, and if it rains, then you're gonna get your money back, then they could essentially, like, try and sort of manage some of that risk with the with the events portion of this function. Right?

Yes. And we have a team looking at such examples.

Okay. Okay. I'm sure that's good for invites to wedding to to tennis tournaments as well, which is a which is always always a plus. Okay. I wanted to ask a question then around so we talked about temperature tracking at Heathrow and I hope that has its own power source for various reasons recently.

But I also want to talk about this kind of concept of of wind and how close that is to say a wind farm. Right? So you you said that there are groups that track wind speeds in lots of different places, and obviously, you then also said you had like ways of tracking the flow in certain rivers across Europe, but they don't necessarily always match up with that particular place. Right? So so how do you how do you make sure that, say, the wind speed in this particular part of the North Sea is still, like, a fair approximation of this wind site that's maybe ten, twenty, thirty kilometers away?

So you can either have, like, a classical weather station in a specific place, as you might know it from, like, pictures.

But and then you can look at that historical data that they measure there. Or you can take other sources, for example, satellite data that is gridded data on, a one kilometer or a five kilometer grid. So you can actually pick another specific location that might be closer to your actual asset and then build an index around that? Or what actually, a lot of players are using are, like, nationwide indices trying to match and represent the production of, like, the entire country.

Usually, yeah, you can use those gridded data. You have the power curve of your assets. So you say, okay.

Wind speed measure at that grid level times my power curve. That's a good approximation of my Okay. Electricity production. Usually, if you say my assets, my wind farm represents o point one percent of the nationwide production, you can take that nationwide index, multiply it by that kind of percentage, you get a result which is kind of very well correlated. Usually, is no massive differences in the terms of wind speed. Of course, if you have an asset based in a very special location in the country that tends to behave differently than the rest of the country, then you go more for the gridded data, and then you just pass your power curve, and that's usually kind of the best approximation. But most of the times, your assets or your wind farm or your wind portfolio just tend to behave like the rest of the market, and you just simply can scale down the nation the nationwide index to your installed capacity.

Okay. So lots of flexibility around, like, which data points you take to be the the the thing that is kind of giving you that offset.

That's why people really appreciate, usually, because they can really kind of say, okay. Yeah. They have the impression they can really control the weather risk, and they can really kind of fine tune it to their own risk profile.

And, you know, you can also combine different perils. So you might even look at wind and solar penetration at the same time or include temperature.

So there, you have this ability to be creative and

Customize it.

Okay. Very interesting. I have one final question before we go on to our our last two. Do you've both worked in weather for a while. Do do you do you like the weather?

Do you kind of come out of the office at the end of the day and go, this isn't gonna be good for business, or is it just like is it of no interest at no bad weather.

Either you're happy to follow your hobbies, or it's good for a portfolio.

So No. It's a yeah. It's an interesting one, but usually we are a bit yeah.

It's also good to know that kind of its own purpose that we do that, that we are there also to help businesses and things like that. We also in a company that is happy to take those risks. So I think it's good because we we know that kind of when we have even a bad weather period, it's kind of we'll continue to be in that business next year because we believe in those longer term trend. We believe that on the long run, kind of, it's a we are doing the right thing. So we do not we're not necessarily kind of super concerned by the weather, of course, with a bit of a bias. You know, if I won't say that enough, yeah, when you see a bit of extreme events coming, you're like, enough, oh, okay. That's you look at through the window, but it's it's part of the business.

Think it's a it's a very it's a very measured answer you've given, but I think the answer was yes.

I think you are deep down a weather head.

I used to work on a trading floor before doing was a derivative, and maybe there kind of I could see that we're not maybe leveraging as much as a bit of as we could have used, and then I was way more concerned about the weather.

Okay. Okay. So the people with either the the the the trading skin in the game are very much on on weather. Okay. Moving on to the final two questions. So, Theresa, come to you first. Is there anything you'd like to plug?

I think, no, your weather risk.

There is far too many people still out there that are not aware that they actually have a lot of risk It's a very simple one.

On them.

So a very simple one. And I I feel like as an originator, that is absolutely the plug that you should make.

Yes. And, like, once you know it, then you can make the decision. Like, you keep it or you pass it on, but I think it's good to know it.

Agreed. Okay. And, Pierre, I'll come to you. So is there a contrarian view that you hold?

I don't really think we have a contrarian view, but what I'd like to say is that we really have a bit of a contrarian approach as a as a team and as a company in a sense that I mean, I mentioned the words aspiring partner in the past that we like to have this type of things. When a client approach with a risk, okay. That's really what I want to buy. We really like also to to help our client and say, is it really the right risk that you're trying to mitigate?

Is it the right way to mitigate it? Is it the the right approach? Kind of, at some point, do you really do you really want to do enough, for example, this tenor? Do you really want to don't you want to consider maybe kind of adding changing a bit your product?

Is it really the risk? And the fact that our team actually come from the business side, we have been on the other side. We knew a bit the thing, and we also have always that approach to kind of try to suggest things to the client.

So it's actually we're trying to help. We're not there. We're not consultant. We're not consultant.

We're not adviser, but we're trying to have that contrarian approach as they can have. Really, why are you buying that thing? Did you really think about your risk? Kind of do you really know your risk?

Because we think that kind of if it's well calibrated, it's a wonderful tool, and then usually, kind of, people, they actually it becomes a recurring business. They're really happy to see that. They're really always happy of the outcome. If it's not paying for them, it means that kind of it's yeah.

Their business is profitable, but if it's paying, it's really helping them, so they're always kind of happy, and we really want that. So we prefer to challenge maybe them a bit in the process, in the discussion, have that contrarian approach to make sure that kind of, yeah, it's really efficient.

I like it. I think it's a really good way of sort of operating with clients, particularly in something as opaque as kind of the the multi index by the derivatives which you know, on the outset feels quite complicated. But I think through this conversation we've got to the point where, yeah, once you know the risks you've got, there's a sort of real variety of options out there. I just wanna say thank you both for coming on. It's been a really insightful session and it really helps I think people to understand what is going on behind the scenes of weather.

Thank you for having us.

It was a pleasure.

Thank you.