The power of Weather
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Weather information demonstrates predictive power in forecasting electricity prices in day-ahead markets in real time. In particular, next-day weather forecasts improve the forecast accuracy of Scandinavian day-ahead electricity prices in terms of point and density forecasts. This suggests that weather forecasts can price the weather premium on electricity prices. By augmenting with weather forecasts, GARCH-type time-varying volatility models statistically outperform specifications which ignore this information in density forecasting.
first published as Tinbergen Institute Discussion Paper TI 2007-036/4