Ilmatar’s electricity trading team, Trading, monitors market developments, assesses changing conditions and uses forecast data to support its decision-making. When the weather forecast changes, market conditions can change as well.
At Ilmatar, which focuses exclusively on renewable energy, wind and solar power, all electricity generation is weather-dependent. This makes forecasting the weather as accurately as possible critically important. In addition to local wind conditions, weather forecasts play a major role in determining electricity prices.
“We also monitor precipitation, temperature and wind forecasts across the Nordic region. Around half of Nordic electricity is generated by hydropower and about a quarter by wind power, so weather has an enormous impact on energy trading,” says Jaakko Vehviläinen, Head of Risk Control & Middle Office.
Weather forecasts play a significant role in electricity trading, both in assessing short-term production and in evaluating the broader market situation.
“From an electricity trading perspective, the arrival and departure times of weather fronts bringing wind are particularly interesting and critical, as production can change rapidly and significantly within a short period of time,” says Jyri Ylikoski, Head of Physical Trading.
In addition to local weather conditions, the futures market focuses on broader weather patterns and changes in them: for example, whether low- or high-pressure systems dominate and how long the prevailing weather pattern is expected to continue. At the Nordic level, weather developments can be forecast relatively well about a week ahead, while forecasting local weather conditions is considerably more challenging.
“A particular weather pattern can send the market a similar price signal through several different factors. In winter, high-pressure conditions tend to bring colder weather, increasing electricity consumption, while at the same time there is less wind and precipitation,” Vehviläinen says.
Wind power generation drives the price level
Currently, weather-dependent wind power is Finland’s second-largest form of electricity generation, accounting for 28 per cent of generation, while nuclear power accounts for around 40 per cent. Wind power generation is expected to grow significantly in the coming years, while electricity demand is being increased by factors such as industrial electrification and data centre investments. As the share of weather-dependent generation grows, the importance of weather in the electricity market increases as well.
“Today, electricity prices in Finland are strongly dependent on the level of wind power generation. At the Nordic level, the hydrological situation plays a major role, and reservoir levels have a significant impact on electricity prices. Changes in wind conditions cause substantial price volatility in the day-ahead and intraday markets,” Vehviläinen says.
Weather forecast accuracy has a direct impact on trading
The impact of weather on the electricity market can be clearly seen even within a single winter.
“Last winter, the average electricity price in December was around EUR 36 per megawatt-hour, and in March around EUR 28 per megawatt-hour. In between, during January and February, average prices were around EUR 100 per megawatt-hour higher. The differences can largely be explained by weather conditions. December and March were mild and windy for the time of year, while January and February saw an exceptionally cold period with little wind. Wind turbines also experienced icing,” Vehviläinen says.
However, the significance of weather forecasts is not limited to assessing the general price level. Wind power production forecasts also affect estimates of how much electricity can be produced for the market. If actual production deviates from the forecast, the difference must be adjusted in the intraday market.
“A forecast error almost always results in additional costs compared with a situation where production could have been forecast correctly. If more electricity is generated than forecast, the surplus is sold. If production falls short of the forecast, the missing volume is purchased on the intraday market,” Ylikoski says.
Efforts are therefore made continuously to improve the accuracy of production forecasts. General weather models provide the basis for the forecasts, which are then used to create local forecasts based on the locations of the power plants. Weather data alone, however, is not enough. Forecasts are refined by considering factors such as power plant maintenance schedules and by using actual production data. As the amount of weather-dependent generation increases, high-quality forecasts are becoming increasingly important in electricity trading.
