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.

Use of satellite technology for decreasing risks in agriculture

The exploration of outer space and launching of satellites started in the 1960s. Having some romantic flair in the beginning, the satellite story went on and nowadays satellites are launched often and almost everywhere around the globe and their number is going to grow in the future. Together with that, a new question arose, what to do with a bunch of new information received? A huge lot of information has been gained in the satellite era, but its practical appliance can be seen only in certain spheres of economics.

One of the spheres where data received from satellites are used effectively is agriculture. There is a range of agricultural problems which can be solved with the help of these data. Satellites are classified into ones of high resolution, of medium and of small. Basically for agriculture satellites of medium resolution of 5–250m per pixel are used. What can be seen in such satellite images and what tasks can be done with the help of satellite data?
 

Garden City, Kansas

Using satellite data one can judge about the level of cultivation of soil in specified area, identify actively cultivated and abandoned fields and define their configuration. Also with the help of satellite data it’s possible to get information about the current state of things without visiting a specific field. Analysis of satellite data allows understanding whether agricultural events are properly conducted, whether the technologies of cultivation are not violated, and whether soil requires additional treatment for enhancing fertility. With satellite images it’s possible to evaluate condition of agricultural plants; the normalized difference vegetation index (NDVI) is designed for that. The normalized difference vegetation index is a simple graphical indicator of biomass active photosynthetically that is calculated via several spectral channels. Satellite possesses from 10 to 30 spectral channels. Any satellite has its own set of channels which can be visible, infrared, ultraviolet, thermal, etc. Satellites measure the reflectance of the planet in many spectral resolutions as Earth looks different in various spectral resolutions. Plants reflect light well in one spectrum while plants do absorb it in another spectrum. Correlation of these indicators allows defining live green plants from other objects. The NDVI is one of the most well-known and used index to detect live green plant canopies and to evaluate vegetated areas, their condition and quality.

Let’s see what tasks can be performed with the NDVI.

Monitoring of crop emergence.
Real-time monitoring allows supervising the current situation and forecasting crop yields. Using the NDVI it is possible to detect presence of plants, its dynamics of emergence and growth. Maps of the NDVI with dynamics (various seasons) let tracing peculiar features of seasonal vegetation, its deviations, allow planning, etc. For instance, knowing weather forecast, condition of plants and considering the current date, forecast about the amount of yield in the current year can be made. However, a specific feature of satellite monitoring should be taken in to consideration: satellite technology works for global tasks only, this technology is pointless for small farms. Small local farms do not need satellite technologies in their everyday operations. But this kind of information can be of great importance for wholesale purchasing companies. In this case information about extensive regions is of big interest: what region is more fertile, what plants grow widely and where wholesale can be done.

Field of green onion. Colombia, Aquitania

 Analysis of historical data.
Historical data is information on the cultivation of fields, evaluation of their productivity and the efficiency of the technologies used. Currently a large archive on a daily survey of earth surface is gained. For example, satellites of MODIS system orbit earth on a daily basis since 2000.
 In this archive history on any field cultivation for the last 15 years can be obtained. This is a great opportunity for insurance companies to receive information about a future customer and to decrease potential risks.

NDVI maps

Accurate land tenure.
Nowadays global manufacturers of fertilizers provide quite complex products. These are not only fertilizers simply, but also compound technologic processes for specific kind of plants, for peculiar weather conditions. Basically, a half of the cost of maintaining crop comes to expenses on fertilizers, and issue of proper use of fertilizers is an actual task for farmers. Evaluation of field condition based on satellite, weather and historical data is an available remote tool for analyzing the efficiency of land tenure, which lets significantly reduce commercial risks and expenses on fertilizers.

Evaluation of efficiency of water reclamation systems.
Condition of irrigation and drainage systems, their violation and failures can be estimated by comparative productivity of specific kinds of agricultural plants.

Evaluation of pastures and hunting grounds.
The NDVI allows effectively and at a low cost solving such tasks as assessment of quality of hunting grounds and of pasture productivity for planning of their usage and detecting violations of cattle grazing.

Mitigating of weather risk makes “the weather excuse” invalid

It is hard to overestimate the impact of the weather on human lives. The weather affects how we feel, what we eat and wear, where we plan travelling to — actually it has its impact on all human activities. This is true not only for aspects of everyday life but also for various sectors of the economy and industry. Any industry is subjected to weather risk to some extent.

Every time when devastating weather phenomena take place many companies gets hurt, there are among them property and casualty insurers, construction firms, real estate developers and shipping companies. It is also an essential issue for energy, oil and gas concerns, agriculture enterprises, ski resorts and many other companies from different spheres.

During many decades, “the weather excuse” was enough to explain poor financial results. In the face of global changing of climate the weather starts playing more and more important role in operational performance of companies, and nowadays there do exist technologies and tools to mitigate weather risk significantly, and thus to make “the weather excuse” groundless.

Steady ability to manage weather risk lets companies reduce direct financial losses and gives instruments to better execution of fiduciary duties to shareholders. Certainly a complex approach to detection and management of substantial business risks should include weather risk management.

Uncontrolled weather and controlled weather risks

Weather is changing and will continue to constantly, it cannot be stopped and there is nothing to do about it. Weather activities happening in the past few years speak for themselves: tornado in the southeast of the United States at winter time, unusual droughts, and exceptional outbreaks of extremely cold arctic weather in the northern part of the country.

Such weather phenomena as prolonged drought in California or heavy rainfalls that struck the southeast of Texas 6 months ago can turn into a real disaster for both the population and the economics of many states. It is worth mentioning that fluctuations in expected weather conditions represent growing risks for financial well-being of enterprises conducting business in various spheres of economics and these weather changes violate revenue flow potentionally. It goes without saying that these companies are interested in decreasing of the risks.

There is no way to affect weather, but nowadays there exist technologies (Big data, IoT), methods of data collection and data analysis and other new solutions that allow to diminish weather risks for different business scales, from large companies to individual farmers.

The role of agrosystems in air pollution: satellite technologies suggest a solution

Recently the issue of environmental pollution and of its consequence such as global warming has been highly discussed at different levels from mass media to heads of governments. United Nations conference on climate change which took place in Dec, 2015 in Paris, France obliged countries that use hydrocarbon fuels to decrease emission of greenhouse gases to the atmosphere, and this fact correlates with world economics looking toward implementation of use of renewable fuels. However this process is unacceptable and almost impossible for many countries at the moment. It goes without saying for such countries as Saudi Arabia, Venezuela and India, and even in the USA this decision of the Paris climate summit found its opponents. The denial of vital questions of climate change and global warming is similar to practice of "burying the heads in the sand." These issues do exist and take their toll on world economy not in the best way.

But why are those who are actively concerned about environmental pollution so entirely focused on the issue of hydrocarbon fuels? One can say that emission of greenhouse gases to the atmosphere is only one of several global factors. You would not guess but such sphere of economics as agriculture affects negatively environmental pollution also. In its turn it is agriculture that primarily experiences losses from the effects of climate change. Exceptional weather phenomena (e.g. droughts and heat waves) are often related with air pollution, and all that causes drastic losses of productivity in agriculture. Food safety is the key issue for the society in this century.

According to modern researches, evaporation of fertilizers and animal waste which are rich in nitrogen combines in the air with emissions from fuel combustion and thus aerosols are formed, which can be a major factor of illness and death. These aerosols surpass all other human sources of pollution of fine-grained air on majority of the territories of the USA, Europe, Russia and China. Eventually the excess of fertilizers comes into streams and rivers. Agricultural pollution comes to the atmosphere mainly in the form of ammonia which is released into the air as gas from excessively fertilized fields and animal waste. Then this compound mixes with pollutants from combustion which are generally nitrogen oxides and sulfates oxides produced by vehicles, power plants and industrial processes. Aerosols can penetrate deeply into lungs of living creatures, causing heart or lung disease. The prospects of transition of world energetics to renewable energy sources can seem more than vague, but the control of amount of used fertilizers without affecting crop productivity is more than real. Nowadays the use of fertilizers is a technological process which is far ahead from principle of “the more you fertilize, the more crop you get”. Technologies of fertilizing are designed for each specific agricultural plant, for original weather conditions in a region, for different stages of plant growth, for actual weather, for presence of pests, etc. For proper use of technologies of fertilizing there exist powerful analysis tools providing feedback and accurate evaluation of efficiency of the use of fertilizers on each field. Analysis of weather data allows evaluation and forecast of such characteristics as humidity, precipitation, solar radiation (UV-index).

With the help of satellite communications it is possible to estimate condition of fields, plant growth rate (NDVI-index), while weather history serves to get to know reasons of what is happening. At the moment there are products that let farmers control 100ha fields remotely. Thus modern technologies are here not only to relieve farmers’ work, but also to provide proper control over fertilizers used and by this to decrease environmental pollution.

Impact of climate change on agriculture: problems and their solutions

It is not news nowadays that the climate on earth is changing. And this change is not a long-term prospect, this is a process happening here and now. Consequences of it one can observe in this day and age. Climate change has a global impact on the human environment, nature, wildlife. And surely it also takes its strongest toll on economics. The most vulnerable to climate change agricultural sector turns to be. Many agricultural plants, on manufacture and market sale of which economics of some countries and large sectors of world trade are based, are extremely susceptible to weather changes; unexpected climate changes, not to mention here a process of global warming, can affect production of these plants in the most disastrous way. In its turn this process can directly influence the majority of population of export countries, where cultivation of these plants is basically the only source of income, and in some cases the main element of the food supply. Kenya where about 9% of the world leafy tea are produced and this tea is the largest source of foreign currency for the country faces the situation when more abundant rainfall, severe drought and unexpected frost damage fragile bushes. In consequence, tea plantations are reduced, and to maintain export level of tea it is necessary to start locating new plantations at higher altitudes. This case makes farmers’ work complicated, and many of them can lose their livelihood.  

A rise in temperature, frequent droughts and heat waves reduce the growth period of cassava (Manihot esculenta) on African fields that accordingly affects the crop adversely. Considering that cassava is a staple food in this overpopulated region threat of famine seems quite real.

 “In the case of the US drought, soybean production decreased by 12%, while core production fell by 13% to its lowest level since 2006, according to the Department of Agriculture. Insured crop losses were almost $12bn and overall GDP suffered as a result. Credit rating agency Standard & Poor’s has predicted that weather events like extensive droughts or high temperatures will have a negative impact on credit ratings of corporations and institutions that are affected.”
(с) Allianz Global Corporate & Specialty

Due to frost in Brazil, millions of tons of sugarcane were damaged, which led to a significant reduction in sugar exports. Reuters informs that frosts also would lead to considerable losses of wheat crop in the current season and of coffee crop next year.

Thus one of the most important questions related to climate change including global warming is how it will affect the food supply of the world population which keeps growing.

Humanity can influence climate change only to some small extent. And even if a battle with global warming is successful, the climate on earth still will keep changing. Impact of such phenomena as El Niño is hardly underestimated.

And also one should pay respect to rainfalls, drought or frost, which are temporary, but sometimes protracted.  
Currently a whole package of measures is suggested which can if not change the situation then smooth out the impact and consequences of various weather phenomena on economics in general and on agriculture in particular. For instance, increasing of efficiency of agricultural measures, so-called “current land use” is worth mentioning here. Nowadays these technologies exist which help making choices in how much land to cultivate, how many and what kind of crops to plant in some region and what the best use for fertilizers is in a condition of changing climate.

Here come to help weather forecasts specially designed for agriculture, analysis of historical data, processing of satellite images in various spectrums, etc. A new sector of economics called the weather risk management market highly develops.
Public attitude to insurance in agricultural sphere has been changed. The standard common approach gives its way to thoughtful, based on analysis of all available data one, to insurance of farmers, which can help them survive crises caused by natural disasters.

And there is a hope that the use of cloud and big data technologies, the use of platforms such as VANE Spatial Data SciencePlatform by OpenWeatherMap if not tame weather phenomena, then make them a calculated object for forecast and analysis.