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Experts: Weather, Storage Management Gaining Importance

Experts: Weather, Storage Management Gaining Importance

In the ever-changing climate of energy deregulation, portfolio management tools, such as weather hedging and storage control, are becoming more vital, a panel of industry experts said Thursday at the LDC Forum Conference in Boston, MA.

Since 1997, 1,000 weather-market trades have taken place, representing $2-3 billion in nominal savings, said Darren Wilcox, manager of developing markets for Southern Company Energy Marketing (SCEM). He estimated $15 to 20 billion are at risk each year due to weather changes. He said the purchases in the weather market, such as heating degree-day collars, floors and swaps have helped Southern protect itself.

"Several well capitalized players are making markets in weather risk management products," Wilcox said. "Wall Street is offering to raise debt capital through weather-linked notes, and analysts are beginning to recognize this developing market."

Another result of deregulation, said Peter Tumminello, vice president for Enserch Energy Services Inc., is the ownership of storage is changing hands to new players. These new players need to "get smarter" he said about storage management because the storage space will be limited by the end of the summer. "Due to the remarkable year-on-year inventory, its an interesting market right now for storage. I would argue that storage space will be extremely valuable by the end of this summer. In fact, we're already enter this refill season with storage 40% full throughout the U.S."

While it is too early to estimate the impact of new storage or pipeline projects on storage value, Tumminello said future factors such as the decreased storage ability, lower rig counts, electric generation demand and load growth will drive the value of storage upward. On the other side, the trends of the tightening summer-winter spread, increasing market optimization and low price volatility offer threats to storage value in the future.

With the plethora of divergent trends facing the industry, Tumminello argued storage players need to be fully aware of trading tools, such as balancing and peaking services and the ability to repackage storage contracts to adjust turn capabilities, in order to succeed. "If modeled properly, storage will continue to be the best physical balancing tool in the market."

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