How do different weather conditions influence energy prices? On the World Meteorological Day, Boris Domanovic, Head of Analytics at MET International, provides insight into the impact temperature, wind, and sunshine have on the energy market.
Weather affects different parts of the energy sector in different ways. In power, it is a direct driver of day-ahead prices, and an important input for short-term forwards. In gas, weather mainly determines demand through winter heating and gas-fired power generation. In LNG, weather has a more global impact, influencing demand, supply, and transport simultaneously.
For power traders, weather is part of the everyday market reality: it affects both consumption and generation directly. Temperature influences how much electricity is needed for heating or cooling, and the performance of wind, solar, hydro, and even some thermal plants is shaped by weather conditions – making weather one of the most important inputs in the forecast of short-term power markets.
Weather is a key driver, but not the only one. The availability of power generation also matters, because outages or maintenance of nuclear, thermal, or hydro capacity can shift residual demand and change which technology sets the price.
A mild, windy, and sunny day can sharply reduce the need for thermal power generation – especially gas-fired plants – and can lead to much lower prices. A cold, dark, and still day can have the opposite effect. Weather is therefore not just a background factor in power markets – it directly shapes the fundamental price formation.
The same logic extends beyond the day-ahead market. Expectations for the coming days and weeks influence short-term forward products such as week-ahead and other near-term contracts. Since these products are driven largely by expectations of future average spot prices, weather forecasts become a key input there as well. Traders are not only looking at today’s wind, temperature, and solar output, but also at how the forecast is evolving over the period covered by those products.
High summer temperatures can increase gas demand
For gas, the relationship is different. During winter, colder temperatures can quickly increase local demand for heating, making weather a direct demand driver. Gas demand can also rise through the power sector, when higher electricity demand and lower renewable output require more gas-fired generation.
In summer, the heating component disappears, meaning the main weather-related driver of gas demand in Europe becomes gas-to-power. If temperatures are high however, cooling demand rises, and if wind and solar generation are not sufficient, gas-fired plants may need to run more – increasing gas demand.
For LNG, the weather story becomes more global. Stronger cooling or heating demand in Asia can shift LNG demand and influence global balances. Hurricanes and major storms can disrupt liquefaction, loading, shipping routes, or regasification operations. For traders, weather matters not just locally or regionally, but globally: shifts in Asian weather can affect LNG prices and flows, which then feed into European gas prices and, ultimately, European power prices.
To put it simply, weather doesn’t just influence energy markets – it helps shape them every day. For energy traders, understanding weather means understanding both the physical system and the price formation behind it.
How does the European day-ahead power market work?
In the European day-ahead power market, buyers and sellers submit orders for each delivery hour of the following day. These orders are then matched in a single auction across coupled European bidding zones, using one common market clearing process which considers available cross-border transmission capacity.
This means that the market is not cleared country by country in isolation; power can flow from lower-priced to higher-priced areas as long as the network allows it. The final hourly price in each bidding zone reflects the balance of supply and demand after this cross-border optimization.
In simple terms, the clearing price is set by the most expensive generation still needed to meet demand in that hour. This is why the marginal source matters so much – renewable output, demand, generation availability, fuel prices, and EUA (European Union Allowances) prices all influence which conventional generation is needed and at what cost.
If renewable generation is high and demand is moderate, the marginal generation may be a lower-cost source and prices can fall significantly. If wind and solar output are low, or demand is high, more expensive coal or gas-fired generation may be needed, pushing prices higher. When the interconnector capacity is constrained, neighbouring markets cannot fully balance each other, and prices can diverge between zones.