Many players are stating that they think that they should hedge Winter now as this is the risky season. By risky they mean most volatile, most prone to spikes, most likely to cause holes in P&L's. Often this decision is exacerbated because they tend to use more volume in Winter than in Summer and so if it does spike the effects can be more dramatic.

Recent analysis shows that this is not the case. Summer and Winter volatility historically have performed very similarly (with on many occasions Summer being more volatile than Winter). Furthermore, in the last three Winters we have seen one serious spike (Nov 2005) this was caused by gas supply issues where the physical supply of gas into Europe and specifically the UK was hindered. Some might argue that Rough's outage was a spike but it was very shortlived and because Winter was pretty much over the Summer had to react far more than the Winter.

The last three Summers we have seen sustained spikes (for at least one month) in every Summer. These have invariably been caused by supply shortages as a result of outages on plant. This has been exacerbated by a significant increase in demand often associated with hot weather and increased air conditioning loads.

If we take this to its full conclusion then the answer is to hedge Summer forward and let Winter run on day ahead. (A risky strategy) but one which would have yielded some good results. In reality the trick is to run both Summer and Winter on day ahead and then pick the one month in which the spike is likely to occur, and hedge this forward. In 2006 the month was July, in 2005 it was June (and Nov) in 2004 it was August. In 2003 it was September. So it is clear that history counts for very little. It does explain why there is significant premia for hedging forward in Q3 in Germany and in France and to a lesser extent in the UK. To save guesswork this may be the safest option.