How We Can Address Risk?

How can traders and other stakeholders address the risk to power networks from extreme weather events?

^{Authored by Brian McIntosh Research Director, Power and Renewables at Wood Mackenzie}

From storms and cold snaps to heatwaves, extreme weather events can have major implications for electricity generation and supply – and as a consequence, for power markets. Being able to anticipate extreme weather and understand its potential impact on electricity availability and pricing is therefore extremely useful to market stakeholders, from asset owners and grid operators to power traders.

The risks from extreme weather

Extreme weather events can affect both sides of the electricity supply-demand equation – both by increasing demand and by interrupting supply.

Extreme weather can impact electricity generation, transmission and distribution both in terms of performance and availability in multiple ways. These include temperature changes, water availability, storms, flooding and wind pattern variations, as well as other extreme events such as wildfires or landslides that can cause damage to transmission lines and grid components. For example, extreme temperatures can impede the performance of power plants, cause equipment to overheat and make power lines sag as they expand.

Ultimately, the impact of a given event will depend not only on its severity but on the resilience of the local energy system, including its capacity to predict, tolerate, respond to and recover from its consequences.

Ironically, at the same time as impacting supply, extreme weather also tends to lead to higher electricity demand, as heating is turned up in a cold snap or fans and air conditioners are cranked up during a heatwave. Network load managers can usually turn on standby generating resources to meet the increased demand, however, in a worst-case scenario the grid can be overwhelmed, leading to blackouts.

How can the industry address these risks?

The ability to properly quantify what an extreme event means for power demand, as well as the impact on supply in terms of unplanned extreme weather and power outages, is paramount. Whether an asset operator or a power trader, the more visibility we have into an event as it unfolds, the more confidence the industry can have that industry stakeholders are addressing the likely consequences effectively.

Unfortunately, by its nature, extreme weather is highly unpredictable. The complexity of weather systems means that statistical forecasting and regression analysis based on historical trends is of limited use in predicting the impact of future events. Ideally, therefore, we want access to meteorological analysis that can examine developing weather patterns and interpret the evolving scenario as accurately as possible.

At the same time, the industry needs accurate power outage data concerning the impact of extreme weather on the functioning of the grid. What generating assets are offline or being impacted in terms of performance? Where are unplanned extreme weather and power outages causing congestion?

As well as accuracy, the timeliness of this data is crucial. Extreme weather events can cause significant volatility in local power networks, so the ability to access real-time information provides a significant advantage.

Overall, predictive and real-time data and analysis helps us understand and react to extreme weather events. It can also allow industry stakeholders to get a much clearer idea of what’s likely to happen, get in front of the consequences, and manage the impact on operations or on trading.