Increasing acceptance of weather derivatives will have a positive impact on the credit quality of European energy utilities, according to a report by Standard & Poor’s. One of the most important benefits of such products is their potential for managing price volatility in the energy markets. ‘Weather derivatives can provide utilities with protection from many of the variables in the energy market, not least by hedging some of the risks of generation,’ said credit analyst Paul Lund. ‘They therefore have a positive impact on utilities’ business and financial profiles.’ The report examines how weather derivatives operate and the ways in which they can be used to hedge against price risk. It also examines the development of the weather derivatives market, the political and financial impetus behind that development, and the technological issues affecting the success of renewable energy sources, which are of particular importance to weather derivative products.
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