weather Flashcards
what is weather risk
risk that earnings/revenue will be lower than expected due to weather volatility
how do you hedge your volume risk?
weather hedging/derivatives
what is gross margin equal to?
gross margin = unit margin(price) x volume
how do you manage demand?
weather hedging/derivatives
supply factors for power revenue?
- generation capacity
- fuel storage
- transportation constraints
what is the weather proxy for?
electricity demand
what is the temperature mecca?
65 degrees
is weather physical or financial market?
all financial OTC (weather can’t be stored)
4 major weather derivatives
- temperature
- rainfall
- snowfall
- wind speed
cooling degree day
- measures warmness of weather as compared to 65 degrees
- CDD = Average daily temp - 65
- if below 65, CDD = 0
- energy company gets paid if CDD sum doesn’t make required index (it was cooler than it needed to be to make money from regular business)
heating degree day
- measures coolness of weather as compared to 65 degrees
- HDD = 65 - average daily temp
- if above 65, HDD = 0
- energy company gets paid if HDD sum doesn’t make required index (it was warmer than it needed to be to make money from regular business)
problem with heat ratio below 7?
technology doesn’t exist to create generator that efficient
heat rate that signals inefficiency?
11 or over
2 weather statistics that concern utility companies
- 80 percent say weather is a major determinant of earnings
- 50 percent cited weather as a reason for lower than expected earnings performance
what type of 4th quarter weather will result in lower than expected earnings
warmer
