By Roxane Richter
November 12, 2001 The seasonal maxim “Let it snow” takes on a whole new meaning for utilities, energy risk managers and weather forecasters. Winter – with its blasts of ice storms, clusters of wet hail and flurries of snow – often holds the venerable key to unlocking a cash flow flood for many non-electric utilities.
In fact, one large mid-Atlantic utility said that a “mild” winter season this year could cost them anywhere from $80 million to $90 million in lost profits, whereas a chilly winter season would glean the opposite effect, transforming that dire loss into decent profit. Another Northeastern fuel oil distribution company divulged that it earns 90 percent of its cash flow during the winter season.
“So everyone in energy wants cold air,” chuckled Scott Yukness, a long-range weather forecaster for Minneapolis, Minn.-based Meteorlogix, formerly known as DTN Weather Service.
Weather, it seems, holds a chilling grip on nationwide sales, profits and consumption – affecting an estimated $2 trillion of the $9 trillion-dollar U.S. economy, according to the Chicago Mercantile Exchange. According to weather risk experts, one-Fahrenheit degree movement can raise or lower electric demand from 50 to 500 megawatts and more. But winter, due to heightened heating consumption, affects more gas and oil utilities, while summer is the lucrative season for electric generation and sales.
Predicting Old Man Winter’s wily moves
This year, Meteorlogix’s Yukness predicts that through much of December, the country will see one to two degrees colder temperatures (and areas like Iowa at 4-6 degrees below normal); then January 2002 will warm up a bit, followed by February hitting above average temperatures in the Southeast, but the polar air from Canada will keep the west colder (i.e. cold west; warm east). In other words, Yukness predicts high month-to-month variability this winter season.
On the other hand, the National Oceanic & Atmospheric Administration (NOAA) predicts the west being warmer than normal and the upper Midwest being colder than normal in its long-term forecast. Either way, radical temperature drops – in either direction – can account for dramatic affects on a utility.
Severe weather smacks transmission & distribution
Severe winter weather, like ice storms and heavy hailstorms, can bring transmission and distribution networks to their knees – literally knocking down and disabling power lines through the weight of wet snow, ice accumulation and blasts of wind. And even though critical weather events (blizzards, ice storms, cloud-to-ground lightning, etc.) only occur 20 percent of the time, said Meteorlogix’s Ron Sznaider, vice president of product marketing, “That 20 percent accounts for a lot when it comes to preparedness and profitability.” Plus, seasonal effects on an energy organization can mean a critical generation decision – like deferring to take a generation unit off-line – are often made based upon a (hopefully accurate) long- or short-term weather forecast from sources like Meteorlogix (www.dtnweather.com), Planaytics (www.planalytics.com), the NOAA (www.noaa.gov) and others.
But even the prediction of non-severe weather, like rain, can have a big bottom-line impact on a utility’s earnings. For instance, the Tennessee Valley Authority (TVA) is keenly concerned with water management. It generates a fair amount of electricity through dam networks and must keep a close watch on heavy rains and any hydrological events. So water resource management is essential to their planning, said Sznaider. “For the TVA, near-and long-term forecasting is key. While isolated heavy thunderstorms won’t make a big difference to them, a widespread long-term precipitation and saturated ground in a watershed would – providing them more energy generation.”
Even though weather, to this day, remains as the single largest variable in energy, the advent of increasing weather hedges (forward contracts sold) and greater market efficiency continue to close the gap between consumption, weather and prices.
The science of forecasting is also making great strides through improved technologies and services. One weather expert was noted as saying that just one degree of improvement in the accuracy of a 24-hour weather forecast over the period of a year would save billions of dollars in the energy industry. And hopefully, backed by new technological and scientific strides in weather forecasting, the industry will be able to pocket those savings in the upcoming years.