Power Price Forecasting: Start With the Weather
Precipitation, wind, and temperatures play an ever-increasing role in determining power prices and it comes as no surprise that Norway’s top power market analyst, Tor Reier Lilleholt, talks a lot about the weather.
“In Norway, we have many mountains, so when it rains we can see the inflow in the rivers one hour later,” he says. “But in Sweden, where the forests are covered in moss, when the rain falls, the water gets absorbed in the ground and doesn’t run into the rivers right away.”
Through the years, Tor Reier Lilleholt has become an expert in temperatures, water flow, and hydro because in his native Norway 90% of the energy comes from hydropower.
“Big hydro producers such as Statkraft take snowfall seriously. In winter, they go out with snowmobiles, inspect the snow and calculate the energy that’s in there. You have snow that is light and with no energy, and heavy snow containing a lot of water that will give you more energy.”
Tor Reier’s team combines weather data, digital technology, and deep industry knowledge accumulated over five decades to provide analytics and weather models for companies such as Statkraft.
It’s clear that the more renewable energy we add to the energy mix, the more we'll rely on regional knowledge and forecasting like this. Weather data will become crucial.
In the Volue Insight platform, the weather fundamentals are a major element.
“We start with the raw data from the National Weather Service in Redding and create our own forecast,” says Tor Reier Lilleholt.
As a next step, the weather forecast is transformed into energy.
“We tell the client that, for example, 1mm of rain in Kitzbühel in the Alps will give them a certain amount of energy. We transform the temperatures into consumption, and the meter per second wind speed into the production of wind.”
But with renewables such as solar and wind, forecasts can be accurate only up to a week. And within that week, variations are extreme, up and down every hour. That’s why Volue analysts study closely weather trends and patterns. Unforeseen weather can also affect the power market.
Long-term energy market forecasts
Things were a lot easier when power was 100% controllable and prices fairly stable and easy to predict.
But as Europe and the rest of the world switch off energy from coal, nuclear and gas, and welcome hundreds of thousands of volatile renewables, the power market is changing.
Renewables such as solar and wind are driving the market up to a week ahead, while hydro up to a year ahead. But for a long-term price forecast, analysts are still looking at fuels.
“Coal and gas will remain important in Europe because even though we are transitioning to renewables, we still need fuels to cover all the consumption.”
Long-term, this also becomes about politics and CO2 emission targets.
Germany is a case in point. In two short years, it will shut down 60TWh worth of nuclear production and decrease energy production from coal and lignite.
From a major exporter of power, it will turn into a major importer of power. It will make massive investments in wind and solar, but also in gas which is flexible enough to help balance the non-controllable new renewables. New technologies like batteries and hydrogen can help balance the market and perhaps reduce the use of gas in the next phase.
The interconnectors in Europe will also affect power prices.
Tor Reier’s team now has a forecast until 2050. The 100-page paper explains in detail the expectations for the European power market from the point of view of investment analysis.
“We have forecasts for all geographical areas in Europe with all time horizons – from 15 minutes Intraday forecasts to 30 years of investment analysis. You can check the analysis on our web pages or feed the data into your own models through a modern API. Short-term, we tell power producers what price they are likely to receive for their production as well as what their aggregate production is likely to be. Long-term, they will get a good indication of what will happen all the way up to 2050,” says Tor Reier Lilleholt.