The Big Freeze

Three severe winter storms that swept through the USA caused the 2021 Texas power crisis – a massive electricity generation failure resulting in blackouts in 75% of the state. The devastation caught the world’s attention, with more than 4.5 million homes and businesses left without power for several days. 

 

Damages were estimated at over $195 billion: Texas’s electricity market had more demand than supply and consumers’ easy access to electricity was taken for granted and compromised. 

 

UNFORESEEN EVENTS CAN BE CATASTROPHIC RISKS 

 

When risk is involved, it’s a collaborative responsibility and should be up to all parties to manage it.  

It’s a process all companies undertake, at various levels of depth and analysis. Often, larger organizations have some form of insurance policy to provide protection against risks. However, countless companies toe the line with mitigating their vulnerabilities (after all, that’s what a risk is), by doing the bare minimum to meet regulation, without conducting a full-scale assessment of all exposures.  

HINDSIGHT IS A WONDERFUL THING 

The value of risk management is only realised when something catastrophic happens. So when things work out well, was it because of the steps taken to manage that risk or would the results have been the same without the risk assessment or investment?  

 

And if nothing eventful occurs, are the resources invested in risk management wasteful? 

 

Without the appropriate data and its analysis, some companies are likely to evaluate their risks with one degree of separation in mind (for example, their vendors but not their vendors’ vendors, and so on), which is a rather incomplete picture. In today’s complex and volatile environment, the entire supply chain needs to be considered. Internal and external data sources need to be appraised to make well informed decisions and the integration of data analytics with risk management strategy is becoming more widespread. 

 

 The 2021 Texas power crisis caused power outages in 75% of the state. 

PREVENTION IS BETTER THAN CURE 

Like many disasters, Texas’ recovery from the natural disaster has and continues to cost vastly more than what prevention would have incurred. With the loss of human lives, homes, livestock, agriculture, jobs and businesses, such events highlight the importance of risk management practices. 

 

Large commercial and industrial consumers of energy do or should have a risk management program in place. Especially when you manage budgets that are in the tens and hundreds of millions of dollars. For instance, Walmart’s annual energy bill is around $1 billion. Hence, their exposure to the energy price risk is huge. When organizations don’t manage this price risk, so they’re vulnerable to large variations in their energy budget. Which directly impact their bottom line. 

 

One of our customers is a large grocery chain with a $600 million energy budget. They also have a robust risk management program where they actively monitor and hedge their electricity price risk. During the Texas power crisis, ERCOT electricity prices spiked all the way up $9,000 per MWh. This could have gone higher, but didn’t thanks to ERCOT’s regulatory cap. Our customer had locked in a price of around $29 per MWh, which enabled them to avoid a huge variation in their spending (and the disruption that comes with) enabling huge cost savings. 

 

Today’s CTRM solutions allow companies to assess their positions, enter and manage their hedge trades, and effectively manage risk. Want to find out how we do it? We’d be happy to show you. 

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