Waiting for the Next Polar Vortex


How recent events could prove a harbinger of winters to come.

How recent events could prove a harbinger of winters to come.

Fortnightly Magazine - June 2014

assets have the potential for excellent profits from severe weather events. Such assets include power plants with firm fuel supply, firm pipeline capacity, and back-up fuel. Careful tracking of trends will help tailor the investments to market conditions.

At this time, the forward markets do not fully provide support for these investments, and hence, the opportunities will likely continue to exist, but be speculative. Thus, a premium will be on creative balancing of risks and returns.

In the longer-term, assets that position themselves for long term contracts will be well positioned if they are in the right location. In this category, midstream oil and natural gas infrastructure remains a generation investment opportunity along with the backup capacity necessary to ensure adequate capacity.

Markets also need to devote special attention to the risks of power supply, especially retail power supply. Special hedging attention is needed to manage the potential for coincidence of high volumes and high prices.

Lastly, a contrarian strategy is to assume a hard landing where current trends continue for a longer period without triggering major increases in forward market prices and capacity markets due to such factors as continued regulatory intervention to suppress prices and support particular policy initiatives that inadvertently has in reliability. This could lead to a super spike in prices similar to the recent winter.

ICF has successfully worked with clients to anticipate the current opportunities and continues to monitor developments. 30


1. Therefore, they are not capable of directly inducing infrastructure expansion.

2. There are no requirements for specified amounts of back up fuel to qualify as capacity in capacity auctions, and no studies as to how much should be available.

3. The formal expectations of summer only resources in planning are zero. However, there are several manifestations of this overly optimistic expectation for interruptible load including similar prices being paid over multiple years for winter (generation) and non-winter resources (most interruptible load).

4. As reflected in lack of penalties for poor winter performance, unreasonable expectations, etc.

5. This includes such questions as to duration of firm, the amount of back up fuel, the origin destination combination needed to be considered firm, etc.

6. http://www.marketwatch.com/story/polar-vortex-brought-record-natural-gas-demand-2014-02-03

7. There may have also been gas delivery system elements which did not perform such as compressor stations.

8. http://www.pjm.com/~/media/documents/reports/20140121-cost-based-offers-into-the-day-ahead-energy-market-on-jan-21.ashx. The reader is encouraged to read the full quotation. The key point is that caps were not indexed to fuel costs, and FERC controls price caps. There is still no full commitment to indexing the myriad number of FERC electric price caps. This is especially a problem because there are no price caps in the gas market.

9. ICF estimates. Gross margin does not account for fixed costs. Some plants in the east may have higher variable costs.

10. Grid operators ( e.g., PJM) operate under Federal Energy Regulatory Commission (FERC) regulation and ultimately FERC sets policies, procedures, and market rules. It has not been uncommon for FERC to overrule recommendations of grid operators. FERC on May 9 rejected a PJM proposal designed to diminish incentives