Icap Executes First Solar Derivative Trade

In a sign that the inter-dealer broking world still has tremendous opportunities, and also with a nod to the growing focus on ESG in financial markets, Icap has announced the completion of what it terms a landmark deal in weather derivatives.

The company’s Australian business has brought together a renewable energy provider and a reinsurance company participant with a fixed agreement for the first time. The transaction brokered has enabled an Australian utility company to lock in a fixed price for the electricity generated by its solar plant, with the volume of power in the trade determined by the amount of sunshine on the day. By doing so, the Australian Utility has the certainty of a fixed price in a market that is highly volatile, ensuring that it can effectively manage investment in the solar plant.

The reinsurance company benefits from exposure to the variability in sunshine and power prices, enabling it to diversify its risk exposure across different weather elements and regions, Icap says, adding that initiatives such as this enable market participants to diversify their risks, increase investment in the renewable energy industry and accelerate the transition to a low-carbon economy.

“This deal highlights that, with the changing generator stack in Australia, weather is set  to play an even more important role in generation outcomes and the way in which portfolios manage risk,” says Kellee Campbell, divisional director, energy and commodities Icap Australia. “Along with Icap Australia’s well-established electricity, renewable and gas market broking and data services, weather based structures is a valuable addition to our offering.”

Nick Ernst, managing director, weather markets, TP Icap, adds, “At TP Icap we aim to be the broker for the transition to a green economy, and a key part of that is breaking down the obstacles to renewable energy. The volatility of renewable energy sources such as solar plants, which are affected by changing temperature, sunshine, wind and precipitation, can act as a deterrent for investment. Transactions such as this are an innovative way to reduce the variability in the energy price received by the producer, effectively enabling market participants to hedge the risks in their business and support growth in the solar industry.”