Summer 2022 Recap
Back in April, we predicted summer (May-Sep) air temperature anomalies to look like Figure 1. Essentially, a very warm west into TX then transitioning to normal through the majority of the Midwest and Deep South, with a slightly warm mid-Atlantic and New England. While we generally were in the right direction of “warmer-than-normal”, we missed in the Midwest and Deep South where we should have been one level up (warmer) in anomaly category from “normal” (Figure 2).
Winter 2022-23 Background
Climate experts believe that Winter 2022-23 will be characterized by the third-straight La Nina, the first time this has occurred since the winters of 1973-74, 1974-75, and 1975-76. Climate models are all lining up and pointing to a Nina, to the tune of 80-90% confidence. It is with the forecast of the upcoming La Nina that we base the majority of our winter outlook upon.
La Nina, an event which occurs in the tropical Pacific Ocean, affects the climate of the United States (and the rest of the globe) via oceanic-atmospheric teleconnections, mainly by influencing the location and strength of atmospheric jet streams. It is through these jet streams that “Arctic air” filters down into the continental United States.
But there are other factors that play a role in our winter. The next in line being the available “cold pool” situated in the Arctic. Please be aware that there is a seasonal cycle of ice loss and regrowth in the Arctic which occurs annually. Where climate change has entered the picture is that for the past few decades, the loss is on a steady increase while growth is on a downward trend, resulting in both lower lows and highs of ice volume.
Figure 3, taken from the National Snow & Ice Data Center, shows that the minimum 2022 sea ice area (typically occurring during September) is outside the 1981-2010 inter-quartile and inter-decile ranges. However, 2022 sea ice area is still way above the minimum ever recorded, which happened in 2012.
For a visual of the areal coverage, please see Figure 4 which shows the current coverage as compared to the 30-year average. You can easily see that it is on the “edges” where sea ice is lacking. That being said, sufficient coverage exists for “cold air blasts” should the jet stream set up in a way that makes it possible for a southerly transport.
The final factor in determining our winter outlook is soil moisture. Moisture in the soil acts as a blanket, leading to both higher daytime high temperatures and higher nightly low temperatures. Current soil moisture anomalies are shown in Figure 5. Moisture deficits are most widespread in the West and the Plains, with a less severe drought situation along the East Coast.
Winter 2022-23 Outlook
Based on the above, our winter (NOV-MAR, in aggregate) outlook is presented in Figure 6. The pattern is one of a typical La Nina with generally normal or warm anomalies throughout the country save for a wedge of cold anomalies in the northern Plains and Midwest. Keep in mind that this view is for the aggregate of November through March. It is entirely possible to get a few spells of brutal cold and still actualize a warm anomaly for the entire 5-month period.
What our outlook means regarding hedging is that short-term clean-up hedges or daily call options will likely need to be utilized in order to meet any potential volumetric swing, dependent on the residential make-up of your book. To help you best quantify your zonal swing, we recommend using our “Weather Scenarios” report found under the “Forecasting & Position >>> Hedges” sub-module. Using a minus 3-sigma scenario will provide you with the scenario most commonly seen with an Arctic blast event.
During an Arctic blast, one thing to keep in mind is that day-ahead and real-time prices usually remain high during the overnight hours as well as during the peak blocks. In summary, do not overlook the 7x8 hedge block when hedging.
NOTE: POWWR provides this information as a courtesy to enhance the risk management process and are not responsible for the accuracy of this forecast and/or actions taken as a result of this forecast information.
By Ian Palao
VP, Strategic Energy Services
Mr. Palao specializes in commodity risk management and the science of meteorology/climatology. He serves as one of POWWR’s many subject matter experts. He has 20 years of experience in the energy/utility industry where he used his skills and knowledge of meteorology and advanced statistics. From 2000 through 2011, he worked at TXU Energy Trading/Luminant Energy in Dallas where he served in three capacities. Most recently, he served as Capital/Liquidity Manager of the trading portfolio, optimizing the use of capital while still maintaining profitability. Prior to that, he managed the Weather Derivatives trading desk, devising strategies and executing trades for both speculative and hedging purposes. Upon joining TXU, he served as manager of the Quantitative Risk Group, assisting the company in the identification, quantification, and remediation of financial risks inherent in the company’s multi-commodity trading portfolio. In his first foray into energy/utilities, he was a Marketing Executive with Louisiana Gas Service Company, a local distribution company, where he primarily marketed natural gas technology to commercial and industrial customers. Before that, he served as a Research Scientist under contract to the National Oceanic and Atmospheric Administration (NOAA). Mr. Palao has an M.B.A. from Tulane University. He also has both an MS and BS in Meteorology from Florida State University. He is a member of the Financial Risk Management Committee of the American Meteorological Society (AMS).
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