Gastech News: What are the key consequences of weather-related risks on the natural gas industry?
Stuart Brown: Weather is a significant driver of demand for large segments of the retail gas business. Home and industrial heating are gas-fired all across Europe, safe for the Nordic tier and France, where electricity is more common. So the volatility of earnings that arises from temperature volatility is something that the industry needs to manage. As financial pressures bear down on Europe's utilities, they see more and more benefit from hedging their weather risks. This is important for top-line performance, but weather uncertainty also drives operating profit margins, which can be eroded when weather unpredictability erodes price hedging strategies.
Gastech News: Do you think European energy companies are properly managing weather-related risks at the moment?
Stuart Brown: In the majority of cases, no. While the very largest utilities are actively and effectively addressing these risks, many of even the sizeable gas and power suppliers either choose not to manage this exposure or are just now coming into the game. As hedging weather becomes more and more standard behaviour, this will change, but it takes some time for new products and practices to be built into hedging habits and product use.
Gastech News: What should European gas firms watch for this winter?
Stuart Brown: As ever, forecast outlooks are uncertain, with early prognostications suggesting warmer than normal temperatures in the east and south-eastern parts of Europe. After three warmer-than-normal winters, a trend toward a new normal is pretty clear. Meanwhile, there's a secondary effect that is less remarked on, but still important. Warm temperatures are associated with above-average levels of wind, which bites into thermal's share of the power on the electricity grid. This displaces gas, significantly in some markets.
Gastech News: What are the key factors to keep in mind while structuring weather protection?
Stuart Brown: First, get the balance right between a perfect hedge and a good-enough hedge. We have seen clients work so hard to perfectly assess their exposure to weather that they literally run out of time to do the hedge and miss the chance to cover their exposure for the season. Second, use simple and standard products as much as possible. That said, be open to the structured products that hedge both temperature and gas price risk – those are more and more widely used and compete very effectively with other ways to hedge. And last, when you are entering the market for the first time, don't underestimate the amount of time you need to internally prepare your product approvals and get set up to use the product.
Gastech News: At the upcoming European Autumn Gas Conference, you will be moderating a panel discussion on “Risks in Natural Gas & LNG infrastructure” what will be your key message during the session?
Stuart Brown: The industry is under financial pressure. How does that play out in investment and maintenance spending across the grid and transport system? And is bringing more LNG into the mix, with lumpy deliveries and complex supply chains, changing the infrastructure risk picture?
Gastech News: What are you most looking forward to about the EAGC conference in The Hague in November 2016?
Stuart Brown: EAGC is our annual look in at what's going on in an industry that Swiss Re Corporate Solutions supplies to, but is not really a part of, so it's good to catch up. Plus, the networking is outstanding.
To meet Stuart Brown and find out about the most relevant and topical issues driving the European gas industry today, attend the EAGC in The Hague, 14-16 November 2016.
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