'How to avoid over-hedging this winter'

Updated: Feb 12, 2020

Several retailers have miscalculated this winter's warmer temperatures causing them to over hedge their books. If you're one of them, you're not alone.

Many of us shudder whenever the terms, “Polar Vortex” and “ERCOT $9,000.00 Events”, come up in conversations. These events severely hurt the fiscal health of many retailers and caused some to close up shop altogether.

There are stories of retailers making huge margins during these events, but these stories are few and far between. Some of these success stories resulted from unintended mistakes, oversights, and possibly even laziness.

Here are some tips to help you hedge your book in the coming winter/summer months of 2020.

Don’t Hedge Based on What Happened Last Year

Are you currently over-hedged because of the warmer winter so far in the Northeast? Are you in ERCOT and are planning to hedge more this summer? History doesn’t repeat itself. When making judgment calls, it's helpful to never forget recent events, but remove them and the associated fear from your mindset.

The Law of Averages: Don’t Hedge to Averages

Although, weather sources provide average weather information, Mother Nature rarely provides us with average weather. Peaks and valleys combine to create the averages. Just as important, Human Nature rarely provides average behaviors. So even if all environmental factors are constant, the supply, pricing and human landscape will fluctuate, sometimes wildly.

Don’t Go It Alone

  • Weather is a good example. In late fall, weather sources provided Winter 2019-2020 outlooks.

  • NOAA predicted average to warmer weather for most of the U.S.

  • The Weather Channel had many of the same areas with average to below normal temperatures.

  • The Farmer’s Almanac provided a plethora of scenarios they termed the “Polar Coaster”

If every weather service predicted the same thing, that certainly would be a loaded deck worthy of hedging with greater confidence. However, the fact is, that among these three outlooks, only one of them might be correct… or none of them. Even if you aggregate the three, a more precise prediction might emerge, but it still would be difficult to determine accuracy.

With so much on the line, depending on only one person, data set, weather source or department increases your company’s risk. Collaboration and data aggregation are always good. Using data analytics generated by experts outside your company helps ensure your information isn’t biased, developed in a vacuum, or influenced by unrealistic corporate pressures.

Gambling is a Science: There’s Safety in “Numbers

The best gamblers are not the lucky. They work hard, play the odds, analyze every card played and constantly assess their competition. When dealing with the uncertainty of weather across a season, the more scientific your approach, the better the odds will fall in your favor.

Every Retail Energy Provider has myriad sources of data coming in constantly from industry news, weather, ISO’s, utilities, finance, customers, etc. Sometimes there is data overload. Alternatively, bits of data are viewed selectively and not shared.

Quite often, the critical information does not reach the professional who needs it to act in a decisive or timely manner. Use today’s technology to streamline the important data, deliver it in a usable, real-time format and share it with those who have a need to know; avoid “If only I had only known” scenarios.

Think about times when your company has had “bad luck”. Was a postmortem conducted? Did you discover that there were warning signs along the way? Afterwards, did you revise your operations and information systems to reflect what you learned?

Actions to Take to Increase Your Odds of Success:

  • Aggregate data: To the extent possible, multi-source your data as well as diversify risk by using third-party, expert information. Safer bets emerge from sound analytics.

  • A.B.C. (Always Be Crunching): Avoid the real-time market through 24/7 analysis of data. The shorter the forecasts, the better the accuracy. Find the sweet spot where accuracy matches your risk tolerance.

  • Centralize and decentralize information access: Knock down silos of data hoarding; make valuable information accessible to all. Centrally store all your data in one place to avoid redundancy and make it easier to locate, but decentralize its use by segmenting pieces of the data and customize reports for those who can act on it.

  • Call audibles: Learn from bad bets; adjust your game plan across your entire organization to avoid history repeating itself. People come and go, memories fade, a solid process continues forward improving your luck.

  • Lean on experience: Those with deep experience are smarter, have seen it all (or most) and, quite possibly, have strong intuition. They are likely to have built a network providing them with the best information, insight and when needed, connections to other experts.

  • Don’t go it alone: Be willing to include points of view outside of your organization. Peers, experts and consultants will always have valuable insights to add. If you need advice or further assistance with your hedging this winter/summer season of 2020, please feel free to contact McKenzie Meek for a free consultation at 352-232-9545 (mmeek@powwr.com).

Well-shaped hedges in February, 2020.

NOTE: POWWR® provides this information as a courtesy to enhance the risk management process and are not responsible for the accuracy and/or actions taken as a result of this posted article.

About POWWR®: POWWR is a client-centric energy management SaaS and managed services company working with Retailers, Public Power entities, Large C&I and others. They combine industry knowledge and expertise with advanced technology and human ingenuity to bring new insights and value to an ever-changing energy marketplace.

POWWR's Risk Services Team Can Help Manage Your Hedges

Brent McIntyre, Senior Director of Risk Services

Brent is one of the most respected risk experts in the energy industry. He heads up the POWWR Risk Department Team and was previousely responsible for taking XOOM Energy from 0 to 300K meters and 0-47 LDC’s. Brent was also the Director of Supply at LifeEnergy, where he was a POWWR client. He respected the quality of our services so much, that he joined our team! bmcintyre@powwr.com | LinkedIn

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