Economic Value of Weather and Climate Forecasts

Case Studies: Energy

Energy


Considine, T.J., Jablonowski, C., Posner, B., and Bishop, C.H. (2004). The value of hurricane forecasts to oil and gas producers in the Gulf of Mexico. Journal of Applied Meteorology, 43, 1270-1281.
Hamlet, A.F., Huppert, D., and Lettenmaier, D.P. (2002). Economic value of long-lead streamflow forecasts for Columbia River hydropower. Journal of Water Resources Planning and Management, 128, 91-101.
Roulston, M.S., Kaplan, D.T., Hardenberg, J. and Smith, L.A. (2003). Using medium-range weather forecasts to improve the value of wind energy production. Renewable Energy, 28, 585-602.


Study Considine, T.J., Jablonowski, C., Posner, B., and Bishop, C.H. (2004). The value of hurricane forecasts to oil and gas producers in the Gulf of Mexico. Journal of Applied Meteorology, 43, 1270-1281.
Structure of Decision Problem Forecast Characteristics Information Valuation
Decision: evacuate offshore drilling rigs and cease production
Dynamics: no
Time Scale: 24 and 48 hours
Predictand: hurricane track and intensity
Format: probabilistic
Type: realistic, derived
Quality Changes: yes
Baselines: climatological
VOI, imperfect: $10.5 million per year (1999 US $) for 24-hour forecasts; $8.1 million per year for 48-hour forecasts
VOI, perfect: $239 million per year for 24-hour forecasts; $207 million per year for 48-hour forecasts
Risk Treatment: expected value
Comments $15 million per year increase in value of 48-hour forecasts with 50% increase in accuracy. Forecast value estimates sensitive to assumption about value of statistical life (VSL), with results based on VSL = $2.275 million.
Related Studies Considine, T.J., Jablonowski, J., Posner, B., and Bishop, C. (2002). The efficiency gains from probabilistic weather forecasts: A case study of oil and gas producers in the Gulf of Mexico. National Science Foundation Final Report ATM-9908963, 102 pp. [pdf file available online]


Study Hamlet, A.F., Huppert, D., and Lettenmaier, D.P. (2002). Economic value of long-lead streamflow forecasts for Columbia River hydropower. Journal of Water Resources Planning and Management, 128, 91-101.
Structure of Decision Problem Forecast Characteristics Information Valuation
Decision: hydropower sales on spot market
Dynamics: yes
Time Scale: monthly to annual
Predictand: precipitation, temperature
Format: probabilistic (ensemble)
Type: idealized (retrospective)
Quality Changes: no
Baselines: current reservoir operating policy
VOI, imperfect: $40-$153 million/year (1998 US $)
VOI, perfect: not reported
Risk Treatment: expected value
Comments Streamflow forecasts derived from long-lead climate forecasts (based on teleconnections with ENSO and PDO). Current reservoir operating policy makes use of snowpack observations, but not climate forecasts. Forecast value proportional to price of power. Assume perfect forecast of ENSO category.


Study Roulston, M.S., Kaplan, D.T., Hardenberg, J. and Smith, L.A. (2003). Using medium-range weather forecasts to improve the value of wind energy production. Renewable Energy, 28, 585-602.
Structure of Decision Problem Forecast Characteristics Information Valuation
Decision: amount of energy to purchase on spot market
Dynamics: no
Time Scale: daily
Predictand: wind
Format: Probabilistic
Type: realistic, derived
Quality Changes: no
Baselines: climatological
VOI, imperfect: 100% for 1 or 2 day lead times, 75% for 3 days, negligible > 5 days
VOI, perfect: not reported
Risk Treatment: expected value
Comments Assumes artificial market model with active future and forward contract trading. Forecast value measured in terms of % increase over expected return for climatological information.


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