Weather Information in Energy Trading

Vincent Kaminski

Some of our academic friends who read drafts of this book were somewhat flabbergasted by the amount of space devoted to weather information and the depth of detail provided. One has to spend some time on the energy trading floors to understand the level of interest, bordering on obsession, that traders have in weather forecasts. We had the privilege to work with a group of very talented professionals at Enron who produced daily weather reports, and had extremely appreciative consumers of this information on the trading floor. The traders developed an excellent understanding of the weather modelling process, sometimes shocking climate scientists invited to deliver lectures with the sophistication and detailed nature of their questions. They would download weather forecasts early in the morning to their PDAs and analyse these reports on tiny screens while driving to work (trading is an occupation for risk takers). It is easy to understand this level of interest: weather is a critical driver of most energy prices on a daily basis, as will be shown in this chapter.

We will start with a review of the channels of transmission from weather conditions to market prices. The channels