Utility companies in winter-peaking demand regions are well accustomed to the challenges of ensuring reliable supply and managing the desired exposure to risk. However, this year may present new supply questions, considering that COVID-related market forces have complicated energy use projections. Utilities and cooperatives, especially smaller utilities and community choice aggregations (CCAs), may not be aware of product opportunities and strategies that can afford flexibility to respond to changing markets and weather-based demand fluctuations.
1. The benefits of a diversified supply
In any industry, utilities included, a lack of diversity in supply creates vulnerability to supply chain interruptions. A diversified supply chain helps keep supply costs low, avoids capacity deficits, and helps ensure reliability.
This issue is particularly pressing in regions with fewer or declining generation resources, such as in the Pacific Northwest, where coal retirements may lead to a burgeoning capacity deficit. It’s also relevant when preparing for winter peaks or other extreme weather events that restrict supplies, such as hurricane season. In the event of emergencies and other unexpected events, supply diversification is a key risk mitigation strategy.
2. The importance of 24/7 trading in physical risk management
Guided by company policy, regional fundamentals, and regulatory requirements, utilities consider winter-peaking needs well in advance. Natural gas peaking supply needs are particularly relevant when preparing for cold weather, as gas storage is a key tool for managing the supply portfolio to meet cold-weather demand.
For both power and gas, utilities consider which products to hedge, and how, informed by the weather forecast and historic use-based projections. However, there’s bound to be discrepancies between projections and reality. Winters that are warmer than anticipated create excess supply that can be sold; colder temperatures can increase procurement needs. As a result, utilities often buy or sell gas and power on a monthly basis throughout the beginning of winter, based on inventory and the extended forecast, to avoid excess spending.
But as the winter progresses, needs and analysis often call for more frequent portfolio adjustments to balance and optimize the value of the portfolio. Frequent trades allow utilities to respond to market conditions with agility, locking in the most favorable prices and adding another layer of protection against diminished capacity. It’s important to note that these balancing transactions require access to a 24/7 trade desk, a service that isn’t available through all wholesale suppliers.
3. Upholding renewable goals during peak season
Renewable supply is top of mind for utilities in states with renewable portfolio standards (RPS), and a key concern of retailers and CCAs with sustainably-minded customers. While renewable development is growing, it's not capable of fully supporting the grid, especially during the winter months when solar generation isn’t as productive.
Again, diversity in supply is key to satisfying these mandated or self-imposed requirements. It’s not as easily achieved in the renewable markets as it is for power and gas. Utilities must often look beyond their standard suppliers to meet their goals, and to their trading and marketing partners to develop and implement customized solutions that optimize the value of these renewable investments. During this process, market analysis is paramount to minimizing risk and keeping costs down, since a degree of price volatility is an observed effect of increasingly variable renewable energy penetration.
4. Unique structured solutions can support your best interests
So far we've explored high-level concepts of winter-peaking risk management. However, optimal utility risk management requires custom solutions. Every organization is subject to different regional, regulatory, and stakeholder demands, and there’s no way to define specific procurement strategies to benefit them all.
Wholesale suppliers with trading power, diverse portfolios, and strong credit ratings can provide a range of robust solutions to public, private, and cooperatively held utilities. These assets often translate into competitive pricing in standard products, diverse energy mixes, and increased reliability.
Utilities and their suppliers can work together to develop best-fit solutions to satisfy customer demand, address risk, and minimize costs. Custom-tailored structured products can optimize value for utilities by enabling nuanced trades and market solutions that take regulations, region, forecasts, market exposure, and other factors into account.