Weather Risk Management in Energy Sector: The Polish Case

Wind power generators face risks derived from fluctuations in market prices and variability in power production, generated by their high dependence on wind speed. These risks could be hedged using weather financial instruments. In this research, we design and price an up-and-in European wind put barrier option using Monte Carlo simulation. Under the existence of a structured weather market, wind producers may purchase an up-and-in European wind barrier put option to hedge wind fluctuations, allowing them to recover their investments and maximise their profits. We use a wind speed index as the underlying index of the barrier option, which captures risk from wind power generation and the Autoregressive Fractionally Integrated Moving Average (ARFIMA) to model the wind speed. This methodology is applied in the Colombian context, an electricity market affected by the El Niño phenomenon. We find that when the El Niño phenomenon occurs, there are incentives for wind generators to sell their energy to the system because their costs, including the put option price, are lower than the power prices. This research aims at encouraging policymakers and governments to promote renewable energy sources and a financial market to trade options to reduce uncertainty in the electrical system due to climate phenomena.

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“…These deviations are aggregated over a measurement period. Additionally, a value of 100 is added to the sum of the deviations [50].…”

Section: Nordix Indexmentioning

confidence: 99%

Wind Put Barrier Options Pricing Based on the Nordix Index

2021

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“…To utilize these models, one should first forecast the risk factors. Using big data analytics makes it possible to find an accurate forecast for risk factors [40]. For instance, big data solutions are widely used to forecast the climatic variables [41].…”

Section: Practical Issues and Challengesmentioning

confidence: 99%

Big Data and Energy Security: Impacts on Private Companies, National Economies and Societies

Hassani

Komendantova

Kroos³

et al. 2021

Preprint

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The importance of energy security for successful functioning of private companies, national economies, and the overall society should not be underestimated. Energy is a critical infrastructure for any modern society, and its reliable functioning is essential for all economic sectors and for the well-being of everybody. Uncertainty in terms of the availability of information, reliable data to make predictions and to plan for investment as well as for other actions of stakeholders at the energy markets is one of the factors, which has the highest influence on energy security. This uncertainty can be connected with many factors such as the availability of reliable data or the actions of stakeholders themselves. For example, the recent outbreak of the COVID-19 pandemic revealed negative impacts of uncertainty on decision-making processes and markets. At the time point when the market participants started to receive real-time information about the situation, the energy markets began to ease. This is one scenario where Big Data can be used to amplify information to various stakeholders to prevent panic and to ensure market stability and security of supply. In a fast-paced digital world characterized by technological advances, the use of Big Data technology provides a unique niche point to close this gap in information disparity by levering the use of unconventional data sources to integrate technologies, stakeholders, and markets to promote energy security and market stability. The potential of Big Data technology is yet to be fully utilized. Big Data can handle large data set characterized by volume, variety, velocity, value, and complexity. The challenge for energy markets is to leverage this technology to mine available socioeconomic, political, geographic, and environmental data responsibly as well as to provide indicators that predict future global supply and demand. This information is crucial for energy security and ensuring global economic prosperity.

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“…They result from the convergence of the capital and insurance market (e.g., contingent capital solutions, insurance-linked securities, weather derivatives). These innovations are analyzed in the studies by: Bolton and Samama (2012), Bouriaux and MacMinn (2009), Culp (2002), Cummins et al (2001), andWieczorek-Kosmala (2020).…”

Section: Application Of Financial Innovations In the Corporate Financial Strategymentioning

confidence: 99%

Barriers to Financial Innovation—Corporate Finance Perspective

Błach

2020

JRFM

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This paper addresses the application of financial innovations from the corporate finance perspective. The objective is to identify and prioritize the main types of barriers to the implementation of financial innovations by nonfinancial firms. The motivation behind the study lies in the importance of financial innovations for the firms’ ability to create value. As proven by the extensive literature review, comprehensive studies on financial innovation applications by nonfinancial firms are relatively rare. To cover this cognitive gap, the theoretical argumentation followed by the discussion of results of the empirical research are presented in this paper. The paper provides the results of two-stage survey research, aiming to find opinions of financial managers (end-users) and experts (creators of innovation) on the main barriers to financial innovations in Poland. According to managers, the most important are exogenous barriers, including: (1) Unclear tax and accounting regulations, (2) complex construction of financial innovations, and (3) transaction costs related to their application. On the other side, the experts from financial institutions recognized the greater importance of endogenous factors such as: (1) Lack of sufficient knowledge about financial innovations and (2) the reluctance to change observable in many firms. This study contributes to the ongoing debate on financial innovations by adding the perspective of corporate financial strategy. It also offers insights into the potential actions (at the institutional and individual level) aiming to reduce the barriers and support the implementation of financial innovations by nonfinancial firms.

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Weather Risk Management in Energy Sector: The Polish Case

Cited by 21 publications

References 53 publications

Wind Put Barrier Options Pricing Based on the Nordix Index

Wind Put Barrier Options Pricing Based on the Nordix Index

Big Data and Energy Security: Impacts on Private Companies, National Economies and Societies

Barriers to Financial Innovation—Corporate Finance Perspective

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