Hedging strategies for risk reduction through weather derivatives in renewable energy markets

Weather elements such as temperature and solar radiation play a crucial role in renewable power production as well as in power consumption. In this research, we address risk management issues of a power producer for its weather, price and production risk exposures. We investigate the extent of natural hedge embedded in the dependence of power production using renewable energy sources and power consumption on weather risk elements. We further develop a framework to construct explicit cross hedges for the risk management objectives of a renewable power producer using weather derivatives: a relatively new class of financial instruments for weather risk management.