As weather forecasting becomes more accurate, utilities and banks are increasingly turning to it – not only to predict power and gas demand – but also to find arbitrage opportunities, writes Gillian Carr.
Weather-based technology is growing increasingly sophisticated, producing more accurate and longer-term forecasts and giving those in the energy industry the tools to better hedge their positions.
As well, the ability to produce faster and more accurate weather predictions provides potential arbitrage opportunities for energy traders with specialist knowledge on how a market may be affected. As a result, meteorologists and weather forecasting consultants have found themselves in increasing demand in the past few years as the industry has awoken to the potential of weather-driven arbitrage and more accurate hedging outlooks.
The more prices fluctuate, the more traders and producers are worried about demand.
Although modern weather forecasting has been around for some 60 years, it’s only in the past 15 to 20 years that the industry has turned its interest to weather technology, particularly starting from the era of energy price deregulation in the US (and to a lesser extent in Europe) in the 1990s. “The more prices fluctuate, the more traders and producers are worried about demand and the more they want to be able to forecast and beat that uncertainty,” says George Young, professor of meteorology at the Pennsylvania State University.