Who can forget the dreaded Polar Vortex of ’14? Energy retailers were caught in a vice-like grip of spiking demand, diminished supply and a rapidly degrading operational capability which crushed business plans and even caused a few to shut their doors.

Those who hadn’t locked-in their gas or power rates prior to last January’s sudden temperature drop learned unhappy lessons about price-risk management, not preparing for Black Swans, and the impact of energy market volatility on the bottom line.

With much of the country currently under snow and PJM Interconnection posting a new record Winter peak use in mid-February, the time seems right to revisit the lessons of the first Polar Vortex.

Lesson number one: extreme and unexpected weather events are the new normal.

A crisis is born
First and foremost people did exactly as expected when the temperatures began to plummet last year, they turned up their thermostats en masse, putting huge strain on the grid. Then generation capacity began to shrink as coal-fired power plants and diesel generators froze up. Pipeline constraints for natural gas also caused problems.
The wholesale energy market responded accordingly: PJM’s average on-peak power price jumped from $50 to $278, and Henry Hub spot prices spiked from $3.95 to $8.15 MMBtu.

At the depths of deep freeze, South Carolina utility SCE&G implemented rolling 15-minute blackouts to manage demand. Many others were openly asking end customers to turn down thermostats or even leave the curtains on South-facing windows open so sunlight could heat their homes. Most grid operators in the affected states were compelled to draw on expensive demand response resources from other suppliers, putting further upward pressure on wholesale pricing.

In a different scenario, surging demand for electricity might have meant increased revenue and profits for all. But peak power isn't always the ideal scenario for energy retailers. With too many customers on fixed-rate contracts, demand and price volatility can obliterate margins.

Lessons for 2015
Inadequate hedging against extreme variability in wholesale pricing ultimately left many retailers financially exposed, and scrambling to pay their bills. When it announced its closure last year, Maryland retailer Clean Currents said spot market prices during the Polar Vortex had shot up by 500 percent. When PJM issued its collateral call the company simply couldn’t afford to pay. Virginia-based Dominion Resources abruptly exited the retail electricity market while the Polar Vortex was just beginning to subside, and 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.

Meteorology has its limits
We’ve now had nearly a decade of news coverage describing cold snaps, heat waves, extreme snowfall and hurricanes as ‘once in a generation’ and ‘unprecedented’. If the first Polar Vortex 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 lower 48 from November to January 2014. In early November 2014 the National Weather Service was predicting ‘milder than normal’ temperatures for the Northeast this winter. Tell that to people in Buffalo.

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.

In energy markets however, information can be power - literally. Better insight into past events can help energy retailers be more proactive and build informed strategies to mitigate the impact of Polar Vortex-level price volatility.

Here are three recommendations for winter 2015 and beyond:

1. Aggregate trade and usage information on a single system. Historical data can then be turned quickly into load forecasts for expected monthly, long-term, short-term, hourly and even sub-hourly demand.
2. Measure current usage against past weather parameters. For example, daily minimum and maximum temperatures.
3. Apply forecasts and the impact of past parameters 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.

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, improving trading and risk management capability has become mission critical.

The winter of 2014 and the current deep freeze across much of the US provide ample lessons all of us. The retail sector needs to continually prepare for ‘once in a generation’ extreme weather conditions.

About the author

Mark A. Hill is a seasoned executive with over 20 years of experience in consulting, marketing, sales and project management. In his role as Vice President of Sales for North America for Allegro, he is responsible for increasing revenue, building a sustainable sales pipeline and maintaining the highest levels of customer service through effective account management practices.

Mark previously served as Managing Consultant at Springboard Consulting U.S., specializing in corporate growth. He also held various leadership roles within the energy and technology industries, including Vice President of Information Systems & Business Practice Management at Calpine Corporation, President at Trendec, and Senior Vice President of Vertical Solutions at Divine.

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