Weather risk management in the electrical power industry

Weather risk management in the electrical power industry

Posted on 02 Sep 2016

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 weather 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.