Extreme Weather is Changing the Energy Ecosystem

November 6, 2019

Informed by the expertise of more than a dozen contributors from around the globe, Schneider Electric’s Global Energy Outlook 2020 will explore five of 2020's most disruptive energy trends. One of those trends – How the Energy Ecosystem is Changing – will focus on extreme weather and the increase in voluntary adoption of climate change-related goals and carbon reduction schemes in the U.S., in Europe and in many other countries. In parallel, experts will look at an organization’s options to ensure the security of its energy supply and proactive decisions it can make to build and maintain energy resilience.

Register here for our upcoming Energy Trends to Watch webinar.

Brian Burgin, Senior Risk Manager, recently joined Senior Commodity Analyst, Robbie Fraser, on our soon-to-be released podcast to pick up this topic (stay tuned, here). Specifically, Burgin and Fraser looked at extreme weather through the lens of developing an adaptive procurement strategy. 

According to Fraser, “We can say that generally, across all the global markets, there's this trend toward more extreme weather conditions, but their impacts play out very differently in different markets. It's very hard to make a blanket statement of ‘This is what weather effects mean for energy prices in the U.S.,’ and the same is true in Europe and elsewhere. You really have to blend a regional understanding with a broader market understanding.”

Historical data proves extreme weather conditions can increase costs even when the infrastructure is not affected. In 2014, a polar vortex settled over the upper half of the United States. Temperatures 20 to 30 degrees Fahrenheit below average settled over half the U.S. for an extended period, causing record-high electrical demand for these areas. Grid operators passed on enormous ancillary charges due to the surge in consumption and non-commodity costs spiked from < $1 per megawatt hour up to $40+ per hour.

Burgin used this as just one example to underscore the importance of procurement professionals understanding how they use energy, not just on a daily basis, but seasonally, as well.

“If you look at winters over the last five years, 2014 was one of the coldest winters in a century while 2016 was one of the warmest. And if you go back to 2012, it was also one of the warmest overall. It's important to understand when you have extreme hot summers or cold winters where demand is quite strong how you consume energy,” said Burgin. “Understanding the way in which you consume energy should ultimately inform how you buy [energy], as well.”

Extreme cold and extreme heat for extended periods are becoming strikingly more frequent. But, these aren’t the only examples of weather events that wreak havoc in energy markets. And, these events are increasingly creating ripples from their point of origin to far-flung geographies around the globe.

“I think one [localized] event that people can think back to that affected almost everybody in some way was Hurricane Harvey — all the rain and devastation it brought to Houston in the U.S.,” added Fraser.

“Your average [U.S.] energy consumer saw a bullish impact because gasoline prices at the pump went way up. But those weather conditions in the U.S. had global implications because so much of the global refining capacity is right there in the Gulf of Mexico, particularly in Texas. Refining capacity went offline with the hurricane, so crude prices actually went down because refiners weren't buying crude anymore. Refined products like gasoline and diesel, meanwhile, not only went up in the U.S., but also around the world, because [of the U.S.’s role as] a net exporter. That effect rippled around the world from localized weather conditions in the U.S.”

Even as this unpredictability is creating increasing interconnected, widespread challenges across borders, forward-thinking organizational leaders are already exploring options to improve reliability. The flexibility they seek complicates the equation for energy producers even further, and well beyond the effects of weather on grid infrastructure.

Resilience comes at cost, unfortunately.

To deliver the kind of reliability customers expect, grid operators and distributors must upgrade infrastructure to accommodate distributed generation (the electricity customers choose to produce on their own). Distributors are passing on the costs of building a smart grid to bill payers in the form of non-commodity charges.

Planning and proactivity are the keys.

“The thing that immediately comes to my mind is the default to being reactionary. Especially with extreme weather, if you’re not worried about it until it hits, the time for action is too late,” said Fraser.

Burgin agreed. “I think that's a real key thing that I see across organizations as far as best practices. [With the threat of extreme weather], the procurement team has to be aligned with the finance team and operations team so that everyone understands how their energy cost and usage impacts the business. Above all, they're all aligned on what their goals are and what the tools are that they will implement to meet their strategy.”

Global Energy Outlook 2020 will dive deeper into energy sourcing strategy and the growing number of options organizations can use to address their energy cost, energy use and energy resilience. It will also look at energy economics and politics, and what energy options in the future look like.

We’ll kick off the discussion later this month with our free webinar, “2020 Global Energy Outlook – The Energy Trends to Watch.” Please register and join us for:

• An overview of global energy markets

• Developments in specific geographies

• Volatility in commodity and non-commodity costs

• The emerging role of data and artificial intelligence

We'll also share recommendations for organizations to consider as they implement their energy strategies for 2020 and beyond.

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