Weather forecasting to manage risk

Mike Zaccardi, CFA, CMT

Utilities face so many risks. Weather is a big one. Weather features can be short-term in nature, of course, but longer-term climate trends are important to monitor.

Climate change is happening, and utilities have to adjust to hotter summers, milder winters, and changes to the typical ‘shoulder season’ months. Morning low temperatures are affected more than afternoon max temps during the summer while sudden extreme cold shots seem to be happening with more regularity during the winter.

Tropical activity is also a little bit higher with more named storms (perhaps care of better satellite & radar activity now versus the middle part of the twentieth century). But there have also been a higher number of major hurricanes in the Atlantic Basin in the last few seasons – we have to be careful not to attribute that directly to climate change, but we can’t dismiss it too.

What’s interesting is that the USA experienced a very quiet patch from 2006 to 2016 during which intense hurricanes largely spared the nation. There were plenty of devastating category 1 and 2 hurricanes and even extreme flooding from tropical storms though. Flooding & storm surge kill more people than other tropical cyclone factors. Though max wind speed gets all the attention typically.

What does this mean for utilities? Managers have to monitor near-term weather forecasts to manage risk. Keeping an eye on where the temperatures are trending in the next two weeks and how the seasonal outlook is progressing is important. In energy markets, futures prices trade based on the same data, so it is very difficult to have an edge when it comes to trading, but we can still manage risk properly.

Computer models are complex, but there are tools available and professionals who can help interpret them for us. The American GFS and European model set are two of the main models we can look to. Aside from hurricanes & temperatures, other factors like wind speed, solar strength (higher in May, June & July of course), cloud cover, and humidity are all important to predicting power demand.

So weather forecasting is very important for utilities when managing their risks. Having a good meteorologist on hand can be very valuable.

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