In my blog post “Using Commodity Management Software to Deal with Extreme Weather,” I discussed the increase in frequency of extreme weather events with a focus on the impact on agricultural markets and CTRM software. This post is a follow up to review the effects of extreme weather on energy, specifically power, and ETRM software. In the case of ags, extreme weather is mainly a supply disruption issue. Extreme weather might cause even more uncertainty in energy markets because it can affect both demand and supply.
Extreme weather events such as droughts, heat waves, hurricanes, and flooding have been increasing in length, frequency, and intensity and are projected to continue to increase throughout the 21st century, according to a recent report by the Intergovernmental Panel on Climate Change.
Power prices are historically extremely volatile mainly due to the lack of cost-effective storage. Since power can’t be stored, there isn’t an effective mechanism to manage price volatility. Add extreme weather events to the mix and we’re off to the races.
Record Breaking Temps = Record Breaking Energy Demand
PJM’s 2015 Winter Report discusses extreme weather events of 2014 and 2015. In 2014 we had the polar vortex in the U.S. Most of us had never heard of a polar vortex before – it sounded like the weather people made up the term right then and there. But it sure was cold!
As per the PJM report,
"On January 6, 2014, temperatures in key consuming regions of the U.S. dropped to an average of -10 °F, with a wind chill of -33 °F. On January 7, 2014, record-breaking temperatures in the PJM territory dropped to 4 °F in Philadelphia, 10 °F in Richmond, and -16 °F in Chicago."
And maybe 2015 didn’t have a fancy name like polar vortex, but it was just as cold.
"Numerous cities across PJM hit their daily low-temperature records during February 2015."
PJM hit record-breaking levels of energy demand and consumption in January 2014 and then surpassed those records in February of this year. On January 7, 2014, PJM set its all-time peak of 142,863 Megawatts and then beat that mark on February 20, 2015 with 143,086 MW.
Challenges for Utility Companies
Extreme weather affects not only energy demand but also supply through generator performance and forced outages.
"During the peak demand hour of the 2014 polar vortex, 22 percent of PJM generation capacity – including coal, gas and nuclear – was out of service. The generation forced outage rate was two to three times higher than the normal peak winter outage rate of around 7 to 10 percent."
PJM put process improvement measures in place after the 2014 experience but the extreme cold of winter 2105 still caused forced outages that were above the normal range.
"Although the 2015 winter peak forced outage rates represent an improvement over the 22 percent forced outage rate during the Jan. 7, 2014, peak, the 2015 rates were still above historical 'normal' winter peak outage rate."
Obviously, if supply and demand are being affected by extreme weather then price volatility is a certainty. Power is normally a volatile commodity, as can be seen in the chart below, and the added effect of extreme weather is clearly evident in January 2014.
The Need for ETRM Software
As dramatic changes in the market take place, the complexity and risk of decisions increase proportionately. Energy companies require next-generation ETRM software solutions to wade through large sets of data in real-time and support optimal decision making. Eka’s ETRM software provides real-time demand, supply, and P&L visibility across physicals and derivatives, identifying exposures and enabling timely decisions and actions. Companies capture, analyze, manage, and report transactions in real-time, giving a complete transparent view of physical and financial positions and exposures. The solution provides sophisticated analytic and visualization tools to support scenario optimization, "what-if" deals, stress testing, VaR, and other advanced risk management techniques.
Extreme weather, volatility, and risk are not going away. It’s time to invest in an advanced ETRM software solution!
