Why weather variations drive electricity demand

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Nov. 26 2019, Updated 4:11 p.m. ET

Weather variations

Weather causes major variations in household and commercial electricity use for space cooling and heating. The summer creates electricity demand for cooling. The winter creates electricity demand for heating homes and offices. A warmer-than-expected summer and a harsher-than-expected winter lead to higher electricity demand for cooling and heating, respectively.

Weather is an important indicator for the power industry. Extreme weather drives electricity demand. This benefits power companies.

Weather

Degree days

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Degree days are used to quantify electricity demand based on weather changes. Heating degree days (or HDD) are used to measure the amount of energy required to heat homes or offices during the winter. Similarly, cooling degree days (or CDD) are used to measure the energy requirement to cool homes or offices during the summer. Higher degree days indicate higher electricity demand.

Weather across regions

The southern region in the U.S. is warmer than the northern region. The region experiences hotter summers than the rest of the country. As a result, it requires more energy to cool homes and businesses. Regions in the south have higher CDD. Southern Company (SO), American Electric Power Company (AEP), and Duke Energy (DUK) are major power companies that operate in the southeastern U.S.

In contrast, states located in the north need more energy during the winters. As a result, these regions have higher HDD compared to the South. Xcel Energy (XEL) operates in North Dakota and Minnesota in the northern U.S. Weather is a key indicator for the Utilities Select Sector SPDR (XLU).

Winter this year

According to the National Oceanic and Atmospheric Administration (or NOAA), the winter should be warmer this year. Last year, the extremely cold temperatures in the U.S. boosted electricity demand to heat homes. This means the electricity consumption could be lower this winter compared to last year.

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