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El Niño: Spanish For ‘Disrupter Of Energy Markets’

Back in 2009, a colleague started laughing as I was explaining how El Niño affects energy markets in the Americas. When I asked why, he told me to Google ‘Chris Farley El Niño’.

While Chris Farley’s short skit (in which the late comedian, dressed as an overweight wrestler, dramatically explains that “El Niño is Spanish for…’the Niño “) may raise a smile, El Niño itself is not really a laughing matter. It is a periodic weather event that causes abnormal weather with profound energy implications. Since the US National Oceanic and Atmospheric Administration (NOAA) predicts there is a 95% chance that El Niño will last until at least spring 2016, it makes sense to consider the energy implications.

Every El Niño is different. However, there are several things we can reasonably expect. During the southern hemisphere’s summer, El Niño brings dry and warm weather to northern South America and warm wet weather to its southern parts. During those same months – winter in the northern hemisphere – the impact on North America is less severe, with a wetter and cooler winter than usual in the southern United States and a drier, warmer one in the northern plains. Meanwhile, early indications are that the west coast will get much more rain than usual, which is good news for hydro generators and others suffering from the drought.

The link between temperature and energy demand is relatively straightforward. If it is hot, and you have access to air conditioning, your electricity demand increases. On the other hand, if it is cold your heating demand will increase. Natural gas is usually the fuel of choice in North America for home heating, especially in the colder north. In the warmer south, both natural gas and electricity are used.

As the southern hemisphere approaches summer, hotter weather can push up electricity demand due to increased air conditioning usage. The problem is that most South American countries are dependent on hydropower for electricity. In years when El Niño occurs, it causes drought in much of South America, and hydropower plants need rain to generate electricity, the increased electricity demand coupled with lower hydro generation can cause blackouts.

If a country has enough thermal power capacity to offset the decline in hydro generation, blackouts can be avoided. However, since El Niño only occurs every few years, that means building thermal power capacity that may not be used very often. Since power plants need to run to generate revenue, building a plant that is infrequently used in most years but heavily during an El Niño makes financing very difficult. As a result, many South American countries have implemented different incentives with varying degrees of success to ensure there is enough thermal power capacity so that the lights stay on during an El Niño.

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