16 Mar MAKE YOUR OWN LUCK
By Ian Palao
How has your hedging plan been working out for you so far this winter?
Let’s face it, many of us are where we are today because of luck (or lack thereof).
Luck is great! When we’re lucky, we:
- Take credit for it
- Look smart
- Get pats on the back
- Make money!
We all get lucky sometimes; some more often than others. However, on the flip side, we are also unlucky sometimes. And when bad luck hits, it often packs a harder punch than good luck. Many of us shudder whenever the terms, “Polar Vortex” and “ERCOT August Events”, come up in conversations. These events severely hurt the fiscal health of many retailers and caused some to close shop altogether.
There are stories of retailers making a lot of money off these events, but these stories are few and far between, and some of these success stories resulted from unintended mistakes, oversights, and possibly even laziness.
MAKE YOUR OWN LUCK BY HEDGING YOUR HEDGING BETS
Full disclosure: The following thoughts are not meant to increase good luck but minimize bad luck instead.
History Doesn’t Necessarily Repeat Itself: Don’t Hedge Based on What Happened Last Year
Are you currently over-hedged because of the warmer winter so far in the Northeast? Are you in ERCOT and are planning to hedge more this summer? Never forget recent events, but do not rely upon them in isolation. Incorporate them into your strategy to come up with a sound plan.
The Law of Averages:
Although we tend to think in terms of averages… average temperature, average load… Mother Nature rarely provides us with average weather. Peaks and valleys combine to create the averages. Realize that hedging is a process, from seasonal to monthly to weekly to daily. Adjust as new and better information becomes available.
Don’t Go It Alone: There’s Safety in Numbers
Weather is a good example. In late fall, weather sources provided Winter 2019-2020 outlooks.
- NOAA predicted average to warmer weather for most of the U.S.
- The Weather Channel had many of the same areas with average to below normal temperatures.
- The Farmer’s Almanac provided a plethora of scenarios they termed the “Polar Coaster”.
If every weather service predicted the same thing, that certainly would be a loaded deck worthy of hedging with greater confidence. However, the fact is that among these three outlooks, only one of them might be correct… or none of them. Even if you aggregate the three, a more precise prediction might emerge, but it still would be difficult to determine accuracy.
With so much on the line, depending on only one person, data set, weather source or department increases your company’s risk. Collaboration and data aggregation are always good. Using data analytics generated by experts outside your company helps ensure your information isn’t biased, developed in a vacuum, or influenced by unrealistic corporate pressures.
Gambling is a Science: There’s Safety in “Numbers”
The best gamblers are not the luckiest people. They work hard, play the odds, analyze every card played and constantly assess their competition. When dealing with the uncertainty of weather across a season, the more scientific your approach, the less bad luck will follow.
Every Retail Energy Provider has myriad sources of data coming in constantly from industry news, weather, ISO’s, utilities, finance, customers, etc. Sometimes there is data overload. Alternatively, bits of data are viewed selectively and not shared. Quite often, the critical information does not reach the professional who needs it to act in a decisive or timely manner. Use today’s technology to streamline the important data, deliver it in a useable, real-time format and share it with those who have a need to know; avoid “If only I had only known” scenarios.
Think about times when your company has had “bad luck”. Was a post-mortem conducted? Did you discover that there were warning signs along the way? Afterwards, did you revise your operations and information systems to reflect what you learned?
Actions to Take to Increase Your Luck:
- Aggregate data: To the extent possible, multi-source your data as well as diversify risk by using third-party, expert information. Safer bets emerge from sound analytics.
- Always be analyzing: Avoid the volatility of the real-time market during extreme periods through 24/7 analysis of data. The shorter the forecasts, the better the accuracy. Find the sweet spot where accuracy matches your risk tolerance.
- Centralize and decentralize information access: Knock down silos of data hoarding; make valuable information accessible to all. Centrally store all your data in one place to avoid redundancy and make it easier to locate, but decentralize its use by segmenting pieces of the data and customize reports for those who can act on it.
- Call audibles: Learn from bad bets; adjust your game plan across your entire organization to avoid history repeating itself. People come and go, memories fade, a solid process continues forward, improving your luck.
- Lean on experience: Those with deep experience are smarter, have seen it all (or most) and, quite possibly, have strong intuition. They are likely to have built a network providing them with the best information, insight and when needed, connections to other experts.
- Don’t go it alone: Unless you have supreme intelligence, judgment, and inordinate chutzpah, invite other colleagues and departments to participate. Be willing to include points of view outside of your organization. Peers, experts and consultants will always have valuable insights to add. Misery may love company, but company helps make luck.
Ian Palao is Vice President of POWWR Risk Management. POWWR is an energy management SaaS and managed services company.