Weather and climate risks have significant impacts on the operating and financial decisions andresults of many businesses, especially energy producers, distributors and retailers. To the extentthat normal weather volatility and long-term climate trend (notably increasing occurrence ofextreme weather) affect energy supply and demand, hedging strategies and instruments thatcan be employed to transfer these exposures to willing risk takers are very valuable.This paper focuses on the strategies and instruments that are used to transfer specific weatherand climate exposures inherent in both renewable energy sources (wind, solar, hydro) andtraditional energy sources. We will explore today’s weather market and the use of customizedweather derivatives for directly transferring financial exposures due to weather and climate.The advantages of these types of instruments over pure commodity instruments will also beexamined using examples of innovative transactions that have been executed globally.
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