Weather risk management in the electrical power industry

Risk management is an opportunity to prevent risk emergence, as well as to mitigate negative effects of different adverse situations. Weather risk is related to physical phenomena which can influence performance of a company and which cannot be controlled from company's side.

One of the industries which is mostly sensitive to weather activity is the electrical power industry.

Basically the market of insurance of weather risk was initially established for purposes of the electrical power industry. Presupposition for this establishment appeared in the mid 90s when deregulation of the energy and urban engineering industries took place. And later on the impetus for emergence of this market was unusually warm winter 1997/98 which was caused by a natural phenomenon of El Niño.

That winter many energy companies of North America experienced heavy losses due to a sharp fall in energy consumption by urban and rural populations. Since that time for insurance against risk of loss due to natural variability of weather the instrument of weather futures has been created. Nowadays for this purpose as basis asset the historical data on main parameters (temperature, wind speed, precipitation) in a specified region is applied. Modern technologies such as digital cloud storages and Big Data allow storing huge array data structures and processing them quickly and provide easy access to necessary information of any time period for any world point.

Influence of weather conditions on the electrical power industry

Weather phenomena have a substantial impact on safe operation of power systems, on modes of power generation and power consumption. 

Influence of weather conditions on the electrical power industry is diversified. Here can be mentioned power lines as quite vulnerable objects. Power lines are affected by significant fluctuations in temperature, by ice and wind loads, by rapid freezing of wet snow, by showers and thunderstorms. Due to wind and ice there were cases of wire break on long distances of tens of kilometers, and also there were collapses of power lines supporting constructions. Thunderstorms can affect operation of urban substations, putting transformers and high-voltage equipment out of action.

Besides devastating weather phenomena there also exist periods of temporary changes of weather that do not possess physical damaging power but have impact on level of power consumption and consequently on demand and price of electricity. For instance, abnormal summer heat can increase level of power consumption by population drastically and thus cause a sharp jump in prices on electricity.

The following approaches are used for weather risk management:

• use of preventive measures basing on forecasts and timely warnings about severe weather phenomena; 
• insurance against extreme weather conditions; 
• Market instruments of weather risk hedging.

Currently 74% of electrical power companies state that they evaluate influence of weather conditions on their financial flow, and 35% of companies claim that they insure against weather risk to mitigate it.