Understanding the link between cold weather and the current energy crisis

The cyclical depletion of energy (associated with cold air outbreaks across the Northern Hemisphere) has led to a consequent spike in price, compounding energy shortage issues driven by the Russia – Ukraine conflict.  This is a paradigm shift in geo-politics where the weather is being weaponised.

What is the cause of this extreme weather and how can we connect these changing weather patterns to the economy in a way that is useful to risk managers looking for ways to quantify their risks in a more holistic, forward- looking way?

The cold weather drives up the amount of energy we need, as well as how much we pay for it. Smarter Business says that when UK electricity demand reaches its peak, it’s estimated that demand rises by 820 Mega Watts (MW) for every degree the temperature drops below 15C.

Drop in Economic Growth

Periods of extreme wintry weather are rare in the UK, but one of them hit the UK in December 2010, and its impact on the economy was later investigated by the Office for National Statistics (ONS). Its findings suggested that the cold snap caused a temporary drop in overall economic growth (GDP), along with dips in the growth of output for retail sales and the UK’s service industries.

A study carried out in 2015 by the Centre for Economics and Business Research (Cebr) suggested that a drop of one degree in the minimum average temperature can cost the UK economy £2.5 billion, thanks to lower output among businesses affected by cold weather plus lost productivity caused by transport delays and people not making it to work.

Surge in Energy Demand

Energy demand in the UK is higher in winter than it is in summer. There are a number of reasons for this increase in demand:

1. colder, darker weather causes the population to stay indoors more, turn on lights for longer periods of time and switch on central heating.
2. British Summer Time, with clocks put back one hour provides an increase in peak demand of 6-7%.
3. In the darker winter months, the UK isn’t able to rely on renewables during times of demand stress.
4. During winter, the UK uses more gas, largely due to the rise in heating. This increased demand raises the gas price and has a knock-on effect on electricity costs.
5. Rain, snow, storms and other extreme weather conditions damages infrastructure leading to higher repair costs and winter energy pricing.

Compounded by the Russia-Ukraine conflict (many countries trying to reduce their dependence upon Russian Oil), the situation is also worsening globally. In some countries, energy prices hit historic levels in 2022. Gasoline, electricity, and natural gas prices skyrocketed as Russia’s invasion of Ukraine ruptured global energy supply chains.

Price Volatility

As a result, households and businesses are facing higher energy bills amid extreme price volatility. Uncertainty surrounding the war looms large, and winter heating costs are projected to soar. Overall, Europe has seen inflation hit 10% in September, driven by the energy crisis, as Europe scrambles to reduce its reliance on Russian Oil.

In the U.S., consumer electricity prices have increased nearly 16% annually compared to September last year, the highest increase in over four decades, fuelling higher inflation. However, households are more sheltered from the impact of Russian supply disruptions due to the U.S. being a net exporter of energy.

Connected Weather Risk

Anomalies in temperature swings (globally), driven largely by huge waves in the jet stream are indeed connected. They are connected both by their creation (thousands of miles away above the Pacific Ocean) and their impacts.

The origin and mechanics of this (December 2022) cold air outbreak are very different  - perhaps more akin to a December 2010 cold weather event - not driven by the stratosphere, but whose mechanics came entirely from the atmospheric layer lower down.

The UK has, however, seen infamous 'Winters' 62/63 where cold shots appeared during December but then deep cold dug in during January and kept its grip on the UK for a fairly unprecedented (in recorded history) 2-months of cold. Ice stretched out from Kent 1 mile into the sea, at the time. While the Arctic conditions meant thousands of schools closed, telephone lines were brought down and power cuts hit thousands of homes – the railway infrastructure the most impacted transport link.

Unusual Weather Pattern

This unusual pattern in 2022 - responsible for lying snow in London in December, which in recent times, happens once or twice a decade has been atmospherically driven. This pattern could last for some time and result in alternating periods of anomalous cold weather across Europe, Asia and the US. So further impacts upon the electricity grid and perhaps infrastructure could occur, coinciding with a greater dependance over the holiday period.

Could this weather pattern be an opportunity for malicious state actors to use the cold weather as a front to gain political and economic leverage? It is not so far-fetched as theories go.

Dutch citizens, for example, have been urged to prepare emergency disaster kits in case a cyber attack or natural disaster hits the country.

The campaign to prepare the kits is being pushed by the country's national coordinator for security and counterterrorism (NCTV) Pieter-Jaap Aalbersberg. He told local media that citizens should be able to survive for two days without water, electricity, or gas in the event that critical infrastructure is compromised.

More Cold, More Cyber Attacks?

The seriousness of cyber-attacks is also taking up officials’ time in the UK, where members of the Cobra crisis management team are dedicating more time to ransomware incidents, according to a report from The Record.

The majority of its meetings are reportedly focused on ransomware attacks in the country, with some saying this demonstrates the government hasn't made substantial progress in neutralising the threat of ransomware.

Cyber-attacks on critical infrastructure and entire nations have been hugely impactful in recent years. In May 2021, for example, a ransomware attack shut down one of the main fuel pipelines in the US.

The company that owns the pipeline, Colonial Pipeline, is responsible for 45% of the fuel supplies on the east coast of the country. It was forced to suspend 5,500 miles of pipeline after it fell victim to the cyber-attack, and eventually paid hackers $4.4 million to regain access to its systems, although around half was recovered by the FBI.

The Stratosphere returning to normal?

Currently the atmosphere and stratosphere are decoupled (and made more complicated by being both in an anomalous state) - that is to say working independently. It is ultimately the pattern of the atmosphere which determines our temperature regime, proving that predicting the weather (and its impacts) far in advance, is never simple. 

One thing is for sure – we won’t entirely know how the rest of winter will play out for a few weeks, but what we can be increasingly confident in is that the Northern Hemisphere will be plagued by more anomalously cold (and then probably warm) air outbreaks for weeks to come – likely creating a cyclical depletion of energy and a consequent spike in price, compounding the shortage issues driven by the Russia – Ukraine conflict.  

Meteorologists are becoming more sophisticated at modelling longer term weather, though the science is unperfected. Likewise, as Ukraine – with support from US and UK cyber experts – has demonstrated, the cyber experts are becoming more adept at gaming cyber threats. We are better at understanding these perils – in isolation. What we haven’t begun to do yet is imagine the possibility of a connected cold weather cyber scenario. An undetectable attack on a nation’s electricity grid at the height of a cold snap does not seem improbable.

What is needed is a forward-looking connected solution, which provides a framework or connected scenario that would allow an insurer, say, or business risk manager to imagine the subsequent connected exposure outcome, and with time – be able to imprint the expected impacts of climate change both directly and indirectly.