Polar Vortex and Its Effects on Energy Costs
Polar Vortex and Its Effects on Energy Costs
When the weather outside is frightful, your energy bills might not be so delightful, which is why hearing the words ‘polar vortex’ may be unsettling for organizations keeping an eye on their winter electricity and natural gas costs. But just because the ominous term is circulating, it doesn’t necessarily mean the sky is falling. Let’s take a closer look at some potential outcomes for winter weather.
What is a Polar Vortex
If it feels like you hear the threat of a polar vortex every winter, it’s probably because you do. The polar vortex is not a new or rare phenomenon, rather it’s the impact on the U.S. that varies each year. The good news is, in most years the movement of a polar vortex across the U.S. does not have drastic effects on average temperatures, or your electricity bill for that matter.
The polar vortex is an area of cold air and low pressure concentrated around the North and South poles. The air moves counterclockwise, keeping it centralized to the poles, however periodically that cold blast of arctic air is pushed southward over the U.S with the jet stream. When the polar vortex is particularly strong, cold air is less likely to plunge further south across the U.S., resulting in a mild winter. When it weakens, the frigid air finds it way southward. The length and lasting effect of that southward push is where your bill could start to feel the chill but that doesn’t necessarily mean significant spikes.
What the Experts are Saying
"Just prior to the end of December and ongoing now through Jan. 6, 2021, there has been a surge in temperatures in the stratosphere above the Arctic Circle," AccuWeather's Lead Long-Range Meteorologist Paul Pastelok said earlier this year. "After the first surge of Arctic air, there are likely to be additional waves of cold air that spread from the Central states to the Eastern states during the latter part of January and into early February," Pastelok explained. While many of us across the U.S. are feeling those frigid effects this week, the general consensus is that the blast of cold air will be relatively short-lived. The good news for your bill is that it requires a sustained blast of cold for prices to spike as they have in prior years.
What to Expect: Looking Backwards to Move Forwards
We’ll leave the weather forecast and polar vortex predictions to the meteorological experts, and instead focus on our area of expertise: energy prices. While there is no roadmap for future prices, what we can focus on is historical prices and trends. In the winter of 2013-2014, the polar vortex brought a sustained blast of cold across the U.S. that spiked electricity demand. With consumers using significantly more energy and wholesale market prices at record highs, there were above average winter energy bills for many consumers.
Why Did Prices Increase in 2014?
According to our colleagues at the Energy Research Council, the increase in demand contributed to the higher prices that winter, but another significant driver were pipeline constraints that drove up the cost to transfer natural gas to electric generators. Peak demand, pass-through costs, and volatile electricity prices created a perfect storm, and yielded a not-so-perfect result for customers.
Should you be concerned?
January 2014’s events are examples of how unforeseen and uncontrollable circumstances can greatly affect electricity prices that impact RTOs, suppliers, and customers, but it’s not a roadmap for how 2021 will play out. Time (and weather forecasts) will tell if this year’s polar vortex will cause sustained low temperatures. There is no need to panic, but it’s certainly something to keep an eye on as weather is perhaps the single biggest driver of near-term energy price volatility.
Next Steps to Consider
APPI recommends reviewing current energy market conditions 12-18 months prior to the end date of your current agreement. If pricing is favorable, you may choose to lock pricing in, even though the energy will not be delivered until after the current agreement expires. If pricing is not attractive, you have time to let your trusted energy advisor monitor the market and help you buy on the inevitable dips in the market. On the other hand, if you wait until the last minute and prices are elevated due to an extreme weather event, you have little choice but to buy at the higher prices.
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Sources: NOAA; Energy Research Council; AccuWeather