The Economic Value of Temperature Forecasts in Electricity Generation
Every day, the U.S. electricity-generating industry decides how to meet the electricity demand anticipated over the next 24 h. Various generating units are available to meet the demand, and each unit may have its own production lead time, start-up cost, and production cost. Total costs can be minimized if electricity demand is accurately forecast. Accurate demand forecasts, in turn, depend on accurate temperature forecasts. This paper estimates the cost savings (i.e., benefits) attributable to temperature forecasts used by the U.S. electricity-generation industry. It does this by establishing the relationship between the quality of temperature forecasts and the quality of electricity demand forecasts at six sites around the United States. It then draws on earlier work by Hobbs et al. on the relationship between the quality of demand forecasts and production costs to estimate the percentage of cost savings from different temperature forecasts. Finally, these cost savings are extrapolated to estimate the to...