CME to launch Wind Power futures and options using Vaisala Xweather indices
The Chicago Mercantile Exchange (CME Group) is set to further expand its range of weather risk transfer and hedging products with a plan to launch Wind Power futures and options based on indices provided by Vaisala Xweather later this year.
Pending regulatory review, the new weather derivative contracts are set to be launched in the fourth-quarter of 2026, the CME said, with the financially-settled Wind Power futures and options expected to help market participants manage risk associated with wind power generation.
The wind futures and options will track and settle against independent datasets provided by specialist Vaisala Xweather.
The indices will model projected wind power output at designated locations, allowing for specific contracts to be tailored to the main wind power producing regions of the world.
For launch, the contracts will be: Wind Power Germany ERA5 100m 2019 Index; Wind Power Germany ERA5 100m 2022 B Index; Wind Power UK ERA5 100m 2022 Index; Wind Power Australia VIC 2024-06 Index; and Wind Power U.S. Texas ERCOT ERA5 100m 2022 Index.
“As wind power accounts for a growing share of electricity generation, hedging renewable energy markets has never been more important,” explained Peter Keavey, Managing Director and Global Head of Energy Products at CME Group. “Our new Wind futures and options contracts will provide market participants with a standardized, exchange-cleared solution to manage their exposure to fluctuating wind production impacting the power stack – all on the same platform as Natural Gas, Power, and Weather.”
“Our work with CME Group brings the same independent, trusted, and rigorously modeled data behind temperature contracts to wind power, giving traders, utilities, and renewable operators a standardized way to manage the financial effects of an increasingly extreme weather environment,” added David Whitehead, general manager of insurance sales at Vaisala Xweather. “It’s a natural extension of the datasets our settlement services team has previously provided CME Group with, and we’re excited to help scale the market for exchange-listed renewable weather derivatives across the US, Europe, and Australia.”
Wind is a key variable in power generation, so enabling suppliers and traders to hedge against a lack of, or even too much, wind is a valuable addition to the weather futures platform at the CME.
Hedging specific weather variables enables volatility to be mitigated and earnings to be smoothed, a key use of weather derivatives and weather futures or option contracts.
Being index based risk transfer and hedging products, these are technically parametric in nature. In the past we’ve seen ILS investment managers allocating capital to weather derivatives markets, as a complementary asset to the more traditional natural catastrophe reinsurance contracts they typically invest in.
