Power Price Forecasting and Weather


The world is evolving. The energy market is changing. And, as the market evolves, so does our perspective on predicting. Precipitation, wind, and temperature all play a growing impact in influencing European electricity prices.


Power prices are increasingly influenced by precipitation, wind, and temperature. Forecasts for renewables such as solar and wind can only be accurate for up to a week. And the changes within that week are dramatic, going up and down every hour. Unpredictable weather can also have an impact on the power sector.


Things were a lot easier when power was completely under control and costs were consistent and predictable. However, as Europe and the rest of the globe transition away from coal, nuclear, and gas energy and embrace hundreds of thousands of unpredictable renewables, the power market is shifting. Renewables like solar and wind are driving the market up to a week ahead, while hydro is driving the market up to a year ahead. Analysts are still looking at fuel prices for a long-term price estimate.


However, as Europe and the rest of the globe transition away from coal, nuclear, and gas energy and embrace hundreds of thousands of unpredictable renewables, the power market is shifting. Renewables like solar and wind are driving the market up to a week ahead, while hydro is driving the market up to a year ahead. Analysts are still looking at fuel prices for a long-term price estimate.


Although projecting one-week-ahead average power prices is required for decision-making, such as analysing forward contracts, its modelling has received insufficient attention. First, rather than directly using anticipated temperature as an explanatory variable, the two-step forecasting method that uses measured temperature as an intermediate variable is more likely to reduce forecast mistakes. Fourth, one-week-ahead weather forecasts can boost both price forecast accuracy and arbitrage profit greatly. The proposed arbitrage method can be adopted by a wide range of participants because it is adaptable to each player's risk tolerance.


Germany generates over 60% of its electricity from renewable sources such as solar and wind power, but France has more than 70 gigatonnes (GW) of nuclear power reactors that provide approximately three-quarters of its electricity. The United Kingdom is unique in that it possesses less than 10 GW of nuclear power and little over 30 GW of wind and solar combined, with gas accounting for most of the rest.