Ask the Experts: How is Weather Driving Energy Prices?

Article by Commodities Management Group

In our monthly Energy Market Intel Webinar series, we offer our customers the opportunity to submit questions to learn more about the energy market trends that may affect their future contracting decisions, such as weather, gas storage and production, and domestic and global economic conditions. Most recently, customers requested further information on the impact of weather and potential repercussions pertaining to the Federal Reserve stimulating the economy.

Constellation’s team of market analysts and meteorologists addresses them here:

How well do you believe weather and locational marginal pricing (LMPs) are correlated?

Weather is a key driver of gas and power prices as it drives usage for space heating in winter and air conditioning/cooling load in the summer. If temperatures are hot enough, that then drives power demand high enough, you will see more expensive “peaking” turbines come online since we cannot store power yet on a large scale. That is what makes it different from all other commodities. You can’t store it for a later date in the sense of thousands of megawatts for several hours.

See the Energy Information Administration (EIA) article on factors affecting electricity prices here.

How does climate warming affect your forecast for an ‘average’ winter in 2020-2021? Shouldn’t you look at the trend rather than simple average?

We are now looking at recent trends as well as climate change now more than ever when making both summer and winter forecasts. Recent summers and winters have been warmer than normal. One impressive statistic that I think captures this idea is that the 10-year normal during the summer months ranks 6^th hottest all time. Winters sometimes have more variability, but we heavily consider recent trends when making our winter forecasts.

The Bermuda High tends to settle over north Texas in mid-summer. When that high-pressure system sets in, does that necessarily mean wind speeds in Texas will be reduced?

Generally, when we have a high-pressure system in place, we have sunny skies and calm winds. Wind flows from high pressure to low pressure, so when we have some sort of frontal system or low-pressure system, that’s when we tend to see stronger wind speeds. That being said, winds will generally be reduced as a high-pressure system sets in, but wind speeds can increase depending upon a few other factors even with that high-pressure system in place.

Have you considered the repercussions to the economy of the Federal Reserve’s eventually ending its quantitative monetary support policies?

There is the saying that has been prominent in equity markets since 2008, “Don’t Fight the Fed”. The Federal Reserve has provided a floor to equity markets since March 23rd as increased its level of intervention. How the Fed unwinds those assets is key. As the chart here shows, the U.S. debt as a percentage of gross domestic product (GDP) had grown significantly since the 2008 financial crisis and has grown further since COVID, which is not represented here. The Federal Reserve was required to provide liquidity to the system as so much of the economy shut down and Congress provided fiscal ~4 trillion in stimulus funding. To hear this topic in greater detail, listen to our inaugural episode of our new Fortunato & Friends webcast featuring Exelon Chief Economist Ed Fortunato and Loyola Economy Professor Dr. John Burger by clicking here.

Get access to more insights on the latest weather and market factors impacting your energy bill by attending our next Energy Market Intel Webinar.

Register for our next webinar