DRIVING ROI The Business Case for Advanced Weather Solutions for the Energy Market
Table of Contents Energy Trading Challenges 3 Skill 4 Speed 5 Precision 6 Key ROI Findings 7 About The Weather Company 8 About Hobson & Company 8 1
Energy-trading companies are continually challenged to make smarter, faster, more profitable trades; yet without comprehensive real-time or near-real-time weather data at granular levels, this can be difficult. Companies must focus on longer-term goals to ensure appropriate hedging and maximize profitability, which require insight into expected seasonal weather patterns and accurate demand planning. The time required to pull this information, generate reports, and analyze the outcomes can be daunting and cumbersome, as the added time can result in lost revenue opportunities especially when the objective is to be the first to act in the market. Hobson & Company, a research firm focused on return on investment (ROI) and total cost of ownership (TCO), has partnered with The Weather Company, an IBM Business, to explore these challenges and highlight examples of operational and business benefits that can be realized with advanced weather solutions for the energy market. In this study, indepth interviews and a survey comprising eight existing customers found that The Weather Company s energy solutions addressed customer challenges and delivered measurable results and a compelling ROI. 2
Energy-Trading Challenges INCREASING THE SPEED AND PROFITABILITY OF SHORT-TERM TRADES Customers key goals include reducing the time needed to make trading decisions and making smarter, more profitable trades. As global markets become more interconnected, the need for a comprehensive global view of the latest forecasts in real-time or near-real-time is critical to being a first-mover. However, when many weather sources still provide their forecast updates via isolated emails and PDFs, this can be difficult and could potentially result in the data being out-of-date and traders not receiving the data as quickly as those at other companies. IMPROVING SUCCESS OF LONGER-TERM POSITIONS Another key pain point is customers ability to accurately hedge their market positions for better long-term position management. Historically, the forecasts for longer terms have not been consistently accurate; as one customer notes, they did not have the seasonal forecast granularity that they do now (no monthly outlooks within the longer seasonal view, and no highlighting of differences between the front and back end of a season). This lack of overall granularity has made it difficult to optimize profitability. REDUCING THE TIME REQUIRED TO GENERATE REPORTS AND ANALYSES Customers want to reduce their time spent pulling data and generating reports to better focus on analysis to drive better trading decisions especially when data comes from many disparate sources and needs to be imported into tools like Excel. One customer notes that it used to take days to create the necessary reports, whereas now they can turn these reports around in just hours. Analytical tools such as regression models also used to take twice as long as they do now. IMPROVING DEMAND-FORECASTING ACCURACY FOR TRADITIONAL POWER AND RENEWABLES Having the data needed to make informed decisions in a timely manner is key to accurately forecasting demand. However, when the forecasts lack granularity, it becomes more difficult to predict potential local weather events that could significantly impact power needs and result in making added purchases on short notice. This is especially notable with respect to renewable energy sources such as wind and solar, which are much more variable. Customers note that a great deal of demand can be served by renewable energy sources; thus, being able to accurately predict these is key to taking advantage of real-time market prices. 3
Customers identified three benefits of advanced weather solutions for the energy market from The Weather Company: skill, speed and precision. Skill INCREASING PROFITABILITY WITH MORE EFFECTIVE SHORT-TERM TRADES As global markets become increasingly interconnected, the need for a real-time, comprehensive global view of the latest forecasts is critical yet many weather sources still provide forecast updates via isolated emails and PDFs, potentially making the data out-of-date by the time is it received. The WSI Trader next-generation weather decision support platform offers key fundamental data in one easy-to-use, interactive platform. In a market where time is money, WSI Trader provides highly skillful, first-to-market, actionable data that gives commodity traders a valuable edge over those looking at isolated emails and graphics. The data received from The Weather Company is part of helping to drive better, more profitable trades. - Trader 0.5% - 10% INCREASE in profitability per trade IMPROVING POSITION MANAGEMENT FOR LONGER-TERM TRADES It is increasingly important to understand weather patterns and trends not just over the next 1-15 days but over the next 3-4 weeks or more, yet historically the provided forecasts for these timeframes have not been consistently accurate. The Weather Company s market-leading Seasonal Forecasts, produced by the industry s most respected long-range forecast team led by Dr. Todd Crawford, help traders more accurately anticipate market movements or hedge against existing positions for the upcoming season and provide the advanced insight needed to minimize risks/maximize profit in the upcoming months. The seasonal data from The Weather Company has impacted hedging and resulted in better position management, allowing for better, more profitable trades, as The Weather Company provides not only long-term spreads for the seasons but also added detail within those seasons. - Head of market research 2.5% - 10% INCREASE in value per longer-term position 4
SPEED REDUCING DATA INTERPRETATION TIME FOR METEOROLOGISTS/ TRADERS Weather data from providers can be difficult to interpret or customize, resulting in added time required for analysis and configuration. WSI Trader enables users to quickly and easily interpret the latest forecast from The Weather Company and determine changes; access 15 days of weather patterns instead of just 10; visualize easy-to-read, weighted model forecasts for each power/gas region and country in tabular and graphical formats; and evaluate precipitation forecasts in key power and hydroelectric regions. 6%- 20% REDUCTION in time spent interpreting weather data REDUCING DECISION-MAKING TIME, INCREASING TRADE SPEEDS Time is money in the energy trading space, and seconds make a big difference to traders looking to take advantage of being a first-mover in a given trade an advantage that could be lost if they do not receive the data as quickly as other traders. The Weather Company provides energy-trading professionals with the advanced notification they need to make critical decisions before the rest of the market with eye-catching, color-coded graphics that detail The Weather Company s predicted confidence for the forecast period, the forecasted difference between previous and upcoming model runs, and immediate forecast verification. The single-screen summary of temperatures and if these are warmer or cooler than normal is always open on every trader s desk and helps them see trends and make trades more quickly. - Head of market research 2.5% - 5% INCREASE in number of trades completed REDUCING THE TIME NEEDED TO CREATE DATA REPORTS/ ANALYSES When weather providers send raw, basic data to traders without further analytics, this can result in much internal time needed to create reports and analyses before the data becomes useful. The Weather Company s Data & Analytics next-generation weather data platform provides a standardized, scalable model that promotes a faster time to market and ensures a competitive edge with quick access to technical documentation. The Weather Company s Data Packages allow access to a variety of weather data feeds to inject a wealth of weather-based insight quickly and easily. It would have taken days to create the needed load forecast reports, and now takes about one hour, and regression models on historical data take about 50 percent less time. - Head of market research 1% - 30% REDUCTION in time to create analyses 5
PRECISION IMPROVING LONGER-TERM POSITIONS WITH BETTER DEMAND DATA Load forecasting depends on weather, yet load-forecast providers have not historically been weather specialists, resulting in the potential for suboptimal forecasts from which to make decisions. The Weather Company s load forecasts are based on the most accurate, timely, spatially-resolute weather forecasts in the industry and are combined with a selflearning neural network for load forecasting and an innovative technique for predicting holiday load. It has been shown to significantly outperform standard ISO load forecasts, with error rates of less than 2 percent in the first few days and continued equal or superior forecasts produced hourly out to ten days. We now have access to much more data, allowing for smarter decisions and improved performance with respect to longer-term positions. - Head of market research 2.5% - 5% INCREASE in longer-term positions REDUCING COSTS WITH IMPROVED SHORT-TERM DEMAND ACCURACY Weather forecasts that lack granularity make it difficult to predict potential local weather events that could significantly impact power needs and result in making added purchases on short notice. The short-term, high-resolution accuracy of The Weather Company s load forecasts is a key win, with forecasts updated hourly as new model data, NOAA observations, and data from Weather Underground are received. The 4 km spatial resolution allows for hyperlocal forecasting to predict storm occurrences likely to affect demand in the very near term. The Weather Company load forecasts provides more data, at a more granular level, to monitor short-term demand more closely, lessening the risk that extra power will have to be purchased at premium prices through the day. - Head of market research 0.5% - 5% REDUCTION in added purchases needed REDUCING NEED TO BUY ON SHORT NOTICE BECAUSE OF POOR ALTERNATIVE ENERGY PREDICTIONS WindCast IQ produces accurate 7-day hourly wind speed and power forecasts at turbine height for any wind farm location around the globe, providing unbeatable accuracy and point-by-point global information to traders. SolarCast provides forecasts of solar power for all projects in CAISO and is available by project or aggregate of projects. Forecasts are updated hourly to provide the most up-to-date information possible. WindCast provides more data than others may have, which is key as wind is hard to predict and can make up 40-50 percent of the total load. Accuracy is needed to take advantage of real-time market prices. - Trader 2.5% - 5% REDUCTION in added purchases are needed 6
KEY ROI FINDINGS The value of advanced weather solutions for the energy market is immediate and demonstrable. A sample organization that completes 50 trades per month with average profit of $5 K/trade; holds an average of 70 longer-term positions per month at an average value of $10 K/position; spends 30 hours a week interpreting weather data and 80 hours per month creating analyses and reports; and makes an average of 120 short-term purchases a year due to poor demand estimates can experience $298 K in benefits per year from better precision alone. With improved skill and speed, annual benefits could be as much as $648 K. For this sample organization, the three-year investment of $320 K generates a positive return in 3.9 months. The three-year net present value (NPV) and ROI are strong at $918 K and 356 percent, respectively. The key financial metrics for the sample organization are calculated by standard methods, as shown below. The NPV calculation assumes a 10 percent cost of capital. FINANCIAL METRIC Payback 3-YEAR VALUE 3.9 months NPV $918,170 ROI 356% FIGURE 1: TABULAR DISPLAY OF KEY FINANCIAL METRICS The following chart shows the extent to which each value driver contributes to the total value of advanced weather solutions for the energy market. For the sample organization, precision represents the majority of the value. BENEFITS BY VALUE DRIVER FIGURE 2: PIE CHART DISPLAY OF VALUE DRIVERS 7
The Weather Company, an IBM Business The Weather Company, an IBM Business, is the world s largest private weather enterprise, helping people make informed decisions and take action in the face of weather. The company offers the most accurate, personalized, and actionable weather data and insights to millions of consumers and thousands of businesses via the company s API, business solutions division, and digital products from The Weather Channel (weather.com) and Weather Underground (wunderground.com). The Weather Company delivers up to 26 billion forecasts daily. Its products include a top weather app on all major mobile platforms globally, the world s largest network of personal weather stations, a top-20 U.S. website, the seventh most data-rich site in the world, one of the world s largest IoT data platforms, and industry-leading business solutions. Weather Means Business. The world s biggest brands in aviation, energy, insurance, media, and government rely on The Weather Company for data, technology platforms, and services to help improve decision-making and respond to weather s impact on business. For more, visit www.theweathercompany.com. Hobson & Company Hobson & Company helps technology vendors and purchasers uncover, quantify, and validate the key sources of value driving the adoption of new and emerging technologies. Our focus on robust validation has helped many technology purchasers more objectively evaluate the underlying business case of a new technology, while better understanding which vendors best deliver against the key value drivers. Our well researched, yet easy to use ROI and TCO tools have also helped many technology companies better position and justify their unique value proposition. For more information, please visit www.hobsonco.com. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any retrieval system, without the written permission of the copyright holder. Hobson & Company, 2017. All rights reserved. All other marks are the property of their 8
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