February 1, 2001
Unpredictable weather and deregulation of Latin America's electricity industry have serious implications for power companies in the region. They must simultaneously manage the risks associated with nature as well as those inherent in a free market.
In Argentina, Brazil and Chile, where power comes mainly from hydroelectric dams, the industry is vulnerable to fluctuations in rainfall. Meanwhile, privatization and deregulation of the electricity market in these countries will require generators and distributors to manage shortfalls and excesses in power more efficiently, a function financial markets are already fulfilling in the US and Europe. The use of financial hedges to mitigate risk
The deregulation and privatization of Latin America's energy industry should spark the use of financial tools such as weather derivatives to hedge against weather-related risk.