Extreme Weather and Energy Risk: Understanding the Impact on Your Organization
Extreme weather events can have a dramatic impact on energy consumption trends, which can disrupt the energy markets and create significant risk for businesses.
The first step to managing this risk is understanding the different ways in which it affects your organization, as well as what you can do about it.
While weather is just one factor that businesses need to consider in their risk management strategy, it’s important to understand how exactly weather and energy risk are related. Here’s a look at a few recent examples.
Hurricane Maria in Puerto Rico
Nearly one year ago, Hurricane Maria wreaked havoc on Puerto Rico, resulting in massive loss of life and damage to the infrastructure supporting their communities.
Among the destruction was the island’s electric grid. The US National Oceanic and Atmospheric Administration (NOAA) has estimated that the hurricane “knocked down 80 percent of Puerto Rico’s utility poles and all transmission lines, resulting in the loss of power to essentially all of the island’s 3.4 million residents." As a result, essential services such as telecommunications and waste and water supply were unavailable, bringing the local economy grinding to a halt.
For businesses on the island, this naturally represented a massive disruption. This kind of impediment to production and operations prevents businesses from earning revenue, of course. But beyond that, it prevents businesses from providing services, resources, and employment at a time when the community needs them most.
Hurricane Maria represents the worst-case scenario for energy risk management, creating risk from the four primary sources:
- Physical: How will your business be able to operate if it loses access to the electric grid? If your facilities will rely on diesel or natural gas-powered generators, will you have sufficient access to fuel to power them?
- Financial: How will a prolonged grid outage affect your operational and/or production capacity, and how will that affect revenue? What will it cost to operate your facilities on backup generation assets?
- Regulatory: Does your risk management strategy account for your ability to meet ordinances, regulations, or industry standards on environmental impact or greenhouse gas emissions? How will a prolonged reliance on emergency generators affect your ability to comply?
- Reputational: In addition to the environmental impact, does your risk management strategy put you at a long-term risk of losing business? Is your organization focused solely on protecting profits, or do you consider whether your facilities' recovery and resources are contributing to or affecting the community’s recovery? How you respond to an event like this will have a direct impact on your reputation among customers, investors, and potential employees.
While Hurricane Maria is a prime example of the full scope of energy-related risk, it doesn’t take a natural disaster to create risk for your business. Two less extreme events from earlier this year demonstrate how weather can combine with market conditions to create a high-risk situation.
Extreme Heat in California, Extreme Cold in New England
In July, Southern California saw several consecutive days with peak temperatures ranging from near 90 to more than 100 degrees Fahrenheit, driving up demand for electricity as air conditioning usage spiked. This had a direct impact on both electricity and natural gas prices in the state, as gas is the primary source of power generation for the grid.
At the same time that demand spiked, several natural gas pipelines were out of service for maintenance, restricting gas supply at a time when electricity generators needed to supply high demand levels. Natural gas prices spiked to more than $39/MMBtu, nearly twice the previous record of about $19.50/MMBtu. As a result, average monthly day-ahead electricity prices in southern California surged above $75/MWh, up from about $28/MWh in June and about $36/MWh in July 2017.
The event echoed a similar spike in prices in New England in January, after a prolonged streak of extreme cold weather drove up demand for gas for heating as well as electricity. In recent years, pipeline infrastructure in the region has failed to expand at the same rate that natural gas demand has grown, leaving the region incapable of meeting demand spikes that coincide with extreme cold weather.
These conditions led to a spike in prices for energy consumers. Amid a cold snap in early January, New England set a record for natural gas spot prices at $78.88/MMBtu, more than $3/MMBtu higher than the previous record set when extreme cold stemming from a Polar Vortex drove up demand in 2014. Power prices followed suit, with day-ahead spot prices averaging $220/MWh in early January, up from ~$30/MWh in early December.
While weather is a significant factor driving energy-related risk for businesses, it’s just one factor that businesses need to keep in mind. To learn more about how the major developments in the energy market could affect businesses, read our Intelligence and Analytics team's 2019 energy market outlook, What to Expect from Energy Markets in 2019.