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from Anne Ku's article on price forecasting


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Forward curve vs price forecast

Forward curves are used to mark trades to market. In liquid and deep markets such as interest rate, foreign currency, and widely traded physical commodities, forward curves are easily available and derived. But in immature electricity markets, it is less clear what is meant by a forward curve. Often this is derived from a schedule of price forecasts, so that the curve is used to predict the likely spot price of electricity several years in the future.


Forward curve

A snapshot of where market participants are currently willing to transact

Either market-observed or derived based on arbitrage relationships between prices and rationality bounds.

The market is always right. The whole exercise of the forward curve is to portray where the market is.

Information is not as useful for planning purposes.

Used for marking positions to market and determining liquidation value.

Forward prices can be locked in today.

Can be used for deal pricing, to the extent that one expects to offset exposure shortly in the open market.

Uniform for all market participants.

Price forecast

A prediction of what might happen in the future

Based on economic/engineering analyses of future supply and demand, regulatory and technological trends, etc.

The market can be wrong. To the extent that the forecaster believes that he/she has better information than the other market participants, such information can be used to "beat the market."

Information is useful for planning purposes.

Should not be used for mark-to-market purposes.

Price forecasts may not be locked in today.

Can be used for deal pricing, to the extent that one does not look for an offset but uses the transaction as a bet on future prices.

Each market participant may have a different forecast.

Source: Kenneth S. Leong, "The Forward Curve in the Electricity Market", chapter from US Power Markets, a Risk Book publication (