Utilizing the Yangtze river delta temperature index for financial risk management in the context of electricity procurement

With the ongoing trend of global warming, frequent non-catastrophic meteorological risks such as high summer temperatures are posing challenges to the stability of power system. Compared with the relatively mature weather derivatives markets abroad, practical applications in China remain at an exploratory stage, with a particular lack of empirical studies and risk management cases based on typical scenarios. To address this gap, this study develops a comprehensive weather derivatives solution for the power industry based on the newly issued Yangtze river delta temperature index, including the design of a pricing model and standardized index futures. Using summer electricity consumption scenarios for a commercial complex and a high-performance computing center in Shanghai as empirical cases, we demonstrate that going long on the “Yangtze River Delta Monthly Cooling Index” futures can effectively hedge against temperature-driven increases in electricity cost. This study confirms that the regional temperature index can serve as an active management tool for non-catastrophic meteorological risks in China, contributing to the practical effectiveness of meteorological finance in serving the real economy.