Let's turn to the weather
Mike Zaccardi, CFA, CMT
Weather matters to utilities. Hot summers and cold winters mean more demand for electricity. Often overlooked, the shoulder months of the spring and summer present their own challenges with higher wind generation output and changing solar generation.
The day-to-day weather models traders and risk managers for utilities monitor are the American GFS and European suites. The American GFS model runs four times per day while the European updates primarily in the afternoon and in the wee hours of the morning. Recently the European model introduced mid-morning and evening runs, but those are not full updates.
The operations models, which run before the ensembles, are more volatile than the latter. It is often better to wait for the ensembles to run before making key risk-based trading decisions. The problem is the market tends to pay attention to the operational runs since those come out first.
The European model suite usually has a higher accuracy score versus the American GFS suite. “King Euro” is often tossed around on weather social media. Perhaps the worst indicator to use is the GFS 11-15 day period of the operational mode. I call this “fantasy land” – some dramatic folks on weather twitter like to post images from this danger zone. Usually incredible blizzard model output during the winter and hyper-canes during the late summer and fall hurricane season timeframe.
Real risk managers weigh the evidence of the ensembles but are also aware of how market prices have already reacted.
Utility risk managers depend on meteorologists to assist them when making important trading decisions.
Map used with permission from Weathermodels.com