Factors affecting the value of environmental predictions to the energy sector

Abstract

Background: Energy extraction, production, and transmission systems are highly sensitive to states of the natural environment such as temperature, wind speed, and even ice cover. Forecasts of such state variables are termed environmental predictions. How much value can such environmental predictions provide to the operator of a given energy system? This paper presents three illustrative Canadian case studies, selected to provide a good cross section across sectors, forecast types, and decision time scales, to provide insights into this important question. Results: Using these case studies this paper examines what distinguishes economically valuable forecasts from economically less valuable forecasts. It is found that the risk aversion of the decision makers, the degree to which the decision has multiple inputs, and the certainty of the forecasts, together with the sensitivity of the system to the environmental variable in question, all play important roles. Conclusions: To the extent that risk aversion results from government regulations and organizational guidelines, the conclusions suggest changes in public policy and industry practices that could help unlock value from currently underused forecasts.