POWWR - 2020 Summer Outlook

Winter 2019-2020 Recap

Cutting to the chase, our Winter 2019/20 outlook did not actualize at all. We predicted some flavor of “cooler than normal” for all but the Southwest and the Intermountain West. The actuals for the November through March period came in as warmer than normal across the nation (Fig. 1). That is not to say that there were not cool (or even cold) episodes from time to time. November actualized cooler than normal east of the Rockies (Fig. 2). December through March did not (Fig. 3).  During the Dec-Mar time frame, the polar vortex either held strong over the Arctic or ventured into the Eurasia region, avoiding North America.  The analog technique doesn’t always produce correct results. Unfortunately, this season was one of those times.

Figure 1

Figure 2

Figure 3

Basis for Summer 2020

El Nino / Southern Oscillation

In the Northern Hemisphere, summers are typically governed by short-term, transient factors. However, as the El Nino / Southern Oscillation is such an overarching teleconnection (with some influence over the shorter term factors), many climatologists still use it as input into a broad summer outlook.  

That being said, the current outlook is for neutral conditions through Summer and into Fall 2020.  The consensus of the probabilistic climate models gives neutral conditions between 55% and 60% probability through the summer months.  By comparison, both “El Nino conditions” and “La Nina conditions” are in the 20% range. 

Soil Moisture

Soil moisture conditions as of early April are displayed in Figure 4. Besides the West and the Gulf Coast, most of the U.S. is not seeing drought conditions. In the world of deregulated energy, the most severe case is in south Texas where there are a few pockets of extreme drought. However, for much of the United States experiencing decreased soil moisture, drought conditions are not so severe that they can’t be leveled off with a series of rain events. For this particular summer, soil moisture may not be an initial cause for concern, but it does bear watching.

Figure 4

The Summer 2020 Outlook

Analogs are indicating a westward expansion of the Bermuda High into the Gulf Coast, Texas, and southern Plains. This would lead to warmer and drier conditions in those areas (Fig. 5). As for the Northern Plains and Midwest, cooler than normal anomalies are indicated. For the East, normal conditions are shown but with the expansion of the Bermuda High, it would not surprise me if some periods of intense heat affected the East Coast.

Besides the East Coast, the risks to this outlook are also in the Midwest. Because of the expansion of the Bermuda High, temperatures in the Midwest could see some variability as the high undulates in size and intensity. These heat events would likely be of a shorter duration (days to a week) than what I expect to see in the South (weeks to a month at a time).

Figure 5

2020 Tropical Outlook

In an “average year”, the Atlantic Basin experiences 12 named storms, of which 6 are of hurricane strength, and 3 of those hurricanes are classified as “major”. For this summer, analogs are showing a generally “average” year, with 12 named storms, 5 hurricanes, and 2 major hurricanes. 

Because of the projected influence of the Bermuda High, Texas has the highest likelihood of landfall with slightly over 40%. Florida is next with slightly under 40%. The East Coast (excluding FL) is at 20%. Analogs are indicating a quiet summer for the central Gulf states of LA, MS, and AL.

Impact of COVID19

The other big unknown for this summer will be the impact of COVID19 on load and price. What we have seen thus far in the RESI sector is a shifting of weekday, early morning load to the mid/late mornings, likely due to a predominance of working from home. This is most dominant in majority residential books. From a commercial book standpoint, overall load is down from 10% to 20%. Keep in mind that this is based on actuals from March and April. The summer months have a bit different daily shape in that the morning ramp is smoother than during winter and spring.

With the proposed phased opening, more uncertainty is cast into the situation. This will likely vary by state. It could also vary by city within a given state. Much is unknown at this point. Our advice is for purveyors of RESI books to proceed as normal regarding load while keeping in mind the increased potential for bad debt expense and pricing that in accordingly to new deals and to any variable rollover pricing.

For C&I books, there needs to be more “data points” before you make any large scale hedging decisions. Knowing your book is of the utmost importance. Office buildings, hotels, grocery stores, restaurants, movie theaters, government buildings, manufacturing facilities, and small retail establishments will all be affected differently during this time. For your largest customers, you could reach out to them as a courtesy call touching upon more than their expectations of future load. This is a great opportunity for customer outreach, to build goodwill, and to create a sticky customer.

One other aspect that needs mentioning and is more applicable once the state/county/city openings begin in earnest is the impact of pent-up demand. From beauty salons to restaurants to other small retail shops, pent-up demand may cause consumer spending and the associated electricity usage of these premises to exhibit characteristics much different than they have in the past. Generic profiles will likely not be representative of that short-term shift with impacts that could lead to increased real-time and ancillary costs in the short term and perhaps to increased PLC/capacity tags and costs in the medium and long term.

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.

Ian Palao - POWWR Analytics

Mr. Palao specializes in commodity risk management and the science of meteorology/climatology. He serves as 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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