Utilities brace for record heat

Mike Zaccardi, CFA, CMT

Heat is on the way. Tomorrow starts July, so that is not shocking. Breaking news – summer is hot. But the upcoming two week stretch may be among the very few warmest first halves of July on record.

The Energy Information Agency (EIA) keeps Cooling Degree Day (CDD) data going back to 1950 for the USA. A little weather & power markets 101 refresher – a CDD is the departure from 65 degrees. So if the average temperature is 80 degrees, that is 15 CDDs.

I call myself an amateur weather nerd, so I try to steer away from making predictions or opinions as it relates to weather-matters, but that’s hard when you work in my industry. So what do I do? I trust the professional meteorologists, but I also keep tabs on the weather model guidance – especially during the coldest and hottest months of the year. One significant change on a weather model run can spell volatility in the energy markets. Utility risk managers must be aware of the risk.

Risk happened fast this past weekend. After hitting 25-year low, natural gas prices surged on Monday – the best day in nearly a year and a half. Why the big move? Certainly some technical short-covering played a role, but the American and European weather model turned up the notch on expected CDDs for the next 14 days.

At the moment, but the American and European temperature guidance suggests the first half of July may even be the hottest on record. The warm anomalies are most likely to be featured from the Great Lakes to the Northeast (and to our friends to the north in Ontario, Canada).

Ok, weather is awesome – but what does this have to do with Utilities? Now more than ever, natural gas is a key input to running power plants. Natural gas represents more than 40% of the overall generation mix – and that can spike during extreme heat when the wind dies down and demand surges.

So take last week and this week as a small example. If rolled the dice, and left your natural gas buying to the real-time market, well you are going to cut a bigger check to your natural gas provider versus last week since prices have surged ahead of the heat.

Follow me on Twitter @MikeZaccardi

Map source: WeatherModels.com