Extreme Weather and Energy

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Extreme Weather and Energy

• An Overview and Case Study Examples

David Montroy Weather Operations Manager and
Coordinator Williams Energy
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Outline

• What is Extreme Weather?
• Role of Weather in Energy Markets
• Electricity
• Natural Gas
• Weather Derivatives
• Examples
• July 1999 Electricity Price Spikes
• Winter 2000-2001 Natural Gas
• El Niño/La Niña 1997-2000
• What about California?
• Summary

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What is Extreme Weather?

• Important for energy at a range of time scales
• Daily
• Highly anomalous temperatures at a location
• Widespread anomalous temperatures
• Multiple days
• Hurricanes
• Persistent heat events
• Seasonal
• Much colder winter than normal
• Excessively wet/dry winter in Pacific Northwest

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Role of Weather in Energy

• Electricity -- Demand
• Weather is a measure of demand
• Quasi-linear for non-extreme
• Hockey stick for extreme heat
• Electricity -- Supply
• Impacts efficiency of power plants
• Fuel for power supply Hydro, Wind, Solar
• Severe weather can impact power transmission
• Wind-induced power outages
• Unsafe operational conditions from high surf off
  coast

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Role of Weather in Energy

• Natural Gas -- Demand
• Weather is a measure of demand
• Quasi-linear for non-extreme
• Hockey stick for extreme heat
• Natural Gas -- Supply
• Hurricanes cause evacuation of offshore drilling
  platforms, even if only forecast to come into
  area
• Excessively rough seas and high winds can cause
  evacuation as well or trigger a shut-in
• Unusually mild winter can soften permafrost and
  (1) prevent transportation of drilling equipment
  and (2) shorten drilling season
• Freeze-off Extreme cold shutting down drilling

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Role of Weather in Energy

• Weather Derivatives
• Definition Financial instruments tied to
  accumulated heating or cooling degree days at
  selected cities
• Standardized on Chicago Mercantile Exchange and
  traded OTC
• Seasonal weather forecasts can influence price of
  weather derivatives
• Some weather derivatives tied to occurrence of
  extreme daily events
• Can be used as a hedging instrument in all energy
  (and other) commodities
• Possible impact on all commodity markets

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July 1999 Price Spikes

• Weather Situation
• Last part of July Hottest temps in several years
• Widespread record highs
• Heat indices 115F (Chicago) and 118F (South
  Bend IN)

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July 1999 Price Spikes

• Energy demand
• Record high demands in Ohio River area
• Reduced plant efficiency
• High air/water temperatures caused generating
  units to run at lower efficiencies due to reduced
  effectiveness of cooling systems
• Other contributing energy factors
• Strained transmission grids and flow cuts due to
  high energy demand
• Market psychology

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July 1999 Price Spikes

• End Results
• Power outages due to insufficient capacity
• Curtailed power to interruptible customers
• Record high power prices

Hourly max 9500
Daily Average OVER 1700!
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Winter 2000-2001

• Steady increase in 2000
• Fundamental increase in NG prices in 2000
• A Normal year
• No El Niño or La Niña
• COLDER

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Winter 2000-2001

• National temperatures

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Winter 2000-2001

• Henry Hub Natural gas Futures

Winter Kicker
Increase due to fundamentals
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February 1996

• Extreme cold and Natural Gas
• Demand Unusually high demand
• Supply Extreme cold caused freeze-off in
  central U.S. (Oklahoma/Kansas) and Southeastern
  U.S.
• Heavy loss of natural gas supply because drilling
  equipment shut down due to persistent cold
  temperatures

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Effect of El Niño and La Niña
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What about California?

• Situation Higher prices for both power and
  natural gas than recent years
• What role has the weather played?
• Principal factor very dry conditions in the
  Pacific Northwest --gt low dam levels and reduced
  hydroelectric supply
• What about weather driven energy demand?

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What about California?

• Summer 2000 -- Southern California

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What about California?

• Summer 2000 -- Northern California

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What about California?

• Winter 2000-2001 -- Southern California

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What about California?

• Winter 2000-2001 -- Northern California

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Summary

• Extreme weather on both seasonal and daily scales
  can impact the energy industry
• Weather impacts both energy demand and supply
• Individual case studies have shown the drastic
  impacts the weather can have