PJM issued its collateral call the company simply couldn’t afford to pay.
And Clean Currents wasn’t the only
casualty. Virginia-based Dominion Resources abruptly exited the retail electricity market in January, while Illinois’ retailer FirstEnergy Solutions announced
a coming June surcharge of $5 to $15 for
220,000 of its customers, to pay for spikes
in wholesale power costs during the deep
freeze. It’s worth noting that New Jersey’s
Systrum Energy lost 5,000 customers in
February when it tried a similar move and
passed on higher energy costs to its non-fixed-rate customers.
In the retail energy sector, unexpected weather and a dynamic book of customers means that the science behind insuring supply can meet demand has to be
nimble, sophisticated and reliable. While
grid operators and large utilities tend to
have robust energy trading and risk management (ETRM) tools in place to mitigate the impact of adverse weather, the
winter of 2014 caught many on the retail
side. With disruptive weather events becoming more frequent and intense, retail
providers need to take immediate steps to
prepare for the next one, and soon.
Extreme & unprecedented.
Welcome to the new normal
Extreme weather didn’t start with the Polar Vortex. The eastern seaboard has endured a series of harsh winters and extreme
snowstorms from 2009-2011, including the
February 2010 “snowmageddon” in Washington that shut down the federal government for the better part of a week.
At the other end of the thermome-
ter, storms mixed with high temperature
blacked out more than 250,000 homes
in the Midwest in early July. A 1998 heat
wave in the mid-west and south drove the
wholesale price of electricity in those states
to record highs, from averages of between
$25 and $40 per megawatt-hour (mwh)
to thousands of dollars per mwh at times
of peak demand. Commonwealth Edison
Chicago at one point paid nearly $4 mil-
lion for $100,000 worth of power. A 2013
study based on models from 21 climate
centers worldwide says more ‘unprecedent-
ed’ heat waves are expected to hit the US
as early as 2020, according to Nature.
The common feature of these events
is their unpredictability. We’ve now had
nearly a decade of news coverage describ-
ing cold snaps, heat waves, extreme snow-
fall and hurricanes as ‘once in a gener-
ation’ and ‘unprecedented’. If January
caught you by surprise, you were in good
company. The Climate Prediction Center
(CPC) had actually forecast higher-than-
normal temperatures for much of the low-
er 48 from November to January 2014.
Climatology clearly has its limits. In
energy markets however, information
can literally be power. Better insight into
past and future events holds the promise
of helping energy retailers be more proactive, and build informed strategies to
mitigate the impact of Polar Vortex-lev-el price volatility.
Here are recommendations to help energy retailers prepare for more weather-related market volatility.
To forecast future demand and react quickly when the unforeseeable happens, trade and usage information need to
be aggregated on a single energy trading
and risk management (ETRM) system.
With a solid analytics component, historical data can then be turned quickly
into load forecasts for expected monthly, long-term, short-term, hourly and even
Once your ETRM system in place,
measuring usage against past weather parameters like daily minimum and maximum temperatures becomes much easier.
Forecasted demand, actual demand and
hourly weather can be displayed or charted in a single view.
These can then be applied to individual trades. By allowing multiple meters to
be assigned to a single retail power contract point, and including counterparty
information associated with each meter,
multiple meter-level demand forecasts can
be aggregated to form the contract-level
demand forecast for a trade.
Finally, you can run various scenarios
to stress demand versus supply and determine if you are within acceptable risk tolerances if not layer in hedges to offset unwanted risk.
Energy retailers will continue to face
events that force them to change their
hedging strategy. In a market where price
hikes can bankrupt you or send customers
fleeing for their incumbent utilities; and
in a regulatory environment where shaky
financial health could mean having your
operating licence pulled by a state monitoring agency, improving the trading and
risk management capability for energy retailers has become mission critical.
The retail sector needs to prepare
for more ‘once in a generation’ extreme
weather conditions. The winter of 2014
provides a cautionary tale for all of us, despite the lights somehow staying on. ⊗