The weather can impact power prices in the short, medium and long run. In the short run irradiation and wind speed (for solar and wind power) and temperature and precipitation (for hydropower) are important drivers of power prices.
Weather unpredictability means that even with perfect models and understanding of initial conditions, there is a limit to how weather forecasts are of use in predicting power prices.
But there is a limit to how far in advance accurate weather forecasts are possible. Scientists show that the weather predictability horizon is limited to 10 to 14 days only. So weather unpredictability means that even with perfect models and understanding of initial conditions, there is a limit to how weather forecasts are of use in predicting power prices.
The weather also has a medium term impact on power prices as the weather changes from year to year and during the year. Aurora Energy Research shows that the yearly average temperature, precipitation, irradiation and wind speed can range from circa +10% to -10% year-on-year.
Finally, climate change is expected to have a long term impact on weather patterns, for example in the US and Europe. In Europe the impact varies per region. It is still unclear if and how these long term trends impact power prices.
Wind and solar: lower power prices on windy and sunny days
Wind turbines and solar panels can provide the vast majority of power on sunny and windy days in countries with a lot of wind and solar power. The near zero marginal costs of wind and solar power lower the power price as a result. We find that a doubling of the share of weekly power generation from wind and solar power in European countries, on average, lowers baseload power prices by 7%.
Coal and nuclear power plants: weather and cooling water
Heatwaves can also impact power prices through their impact on cooling water for inland nuclear power plants or large coal fired power plants. The temperature of cooling water for nuclear power plants must be fairly constant for safety issues. Rivers often provide the cooling water, but they can run dry to critical levels so that water cannot be used to cool the power production. Or hot waste water discharge is prohibited as it further heats up the fresh water which could negatively impact wildlife through algae growth or fish mortality. The reduction of nuclear and coal capacity during prolonged heatwaves drives up power prices, especially in countries like France, Germany and the US.