Weather Derivatives as a Risk Mitigating Tool in Power Sector: A Systematic Literature Review

The weather, be it temperature, rainfall, or wind has always been unpredictable and the frequency of unusual weather events has been rising. These weather changes can affect business in both direct and indirect ways, with the power sector being especially sensitive to weather conditions. Despite the fact that the catastrophic consequences of weather are widely known and have been extensively studied, the rising unpredictability of climate change has made the impact of non-catastrophic weather risks more prominent. To address this growing unpredictability, using weather risk management tools, such as weather derivatives, is becoming increasingly important. This study carries out a systematic literature review through descriptive and thematic analysis to assess the effectiveness of weather derivatives as a risk mitigation strategy in the power sector. The analysis shows that weather derivatives are an effective way to hedge the weather risk of various power sector participants. By offering an adaptable and flexible non-catastrophic weather risk management technique, it lessens moral hazard and unfavorable weather problems. Key Words- Weather risk, Weather derivatives, non-catastrophic, Hedging, effectiveness, Power sector