The Power of Weather
27 Pages Posted: 13 Feb 2009
Date Written: February, 12 2009
This paper examines the predictive power of weather for electricity prices in day-ahead markets in real time. We find that next-day weather forecasts improve the forecast accuracy of Scandinavian day-ahead electricity prices substantially in terms of point forecasts, suggesting that weather forecasts can price the weather premium. When weather forecasts are used to predict the entire density of electricity prices, results are however disappointing. Forecasting uncertainty in term of distributional shape plays a more important role than mean and volatility forecast precision.
Keywords: Electricity prices, GARCH models, weather forecasts, point and density forecasts
JEL Classification: C53, G15, Q40
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