Bridging the Gap Between Seasonal Forecasts and Decisions to Act
The World Climate Service (WCS) operates a commercial forecast service that fulfills government expectations that ensemble forecasts of key meteorological variables with lead times of weeks to months to seasons will help both private and public enterprises manage risk and recognize opportunity created by climate variability. The WCS is now creating a bridge between the computer forecasts and the user decisions on when and how to act on the forecasts that will enhance the economic utility of the seasonal forecasts.
These WCS forecasts are created with a statistical calibration process that compares historical forecasts and verifications to produce an optimum combination of the subseasonal and seasonal forecasts of the U.S. National Weather Service (Climate Forecast System v2) and the European Centre for Medium-Range Weather Forecasts. The WCS multi-model forecasts are available for the entire globe and for specific localities and are displayed as weekly or monthly averages in probabilistic form.
The statistical characteristics of the WCS forecasts are determined in the calibration process by comparing the resulting historical forecasts with observations and demonstrate that the forecasts possess skill that confers advantage to users.
To exploit this skill, the WCS has developed a Hedge Advisor algorithm and browser-based application to assist users desiring to hedge against predicted adverse conditions (for example, warm winters or cool summers for electric utilities.) In these cases, users may wish to moderate losses and decrease overall volatility of earnings by purchasing a financial hedge against the predicted adverse conditions.
For a specified fraction of the climatological distribution considered adverse (for example a warm or cold tercile), the algorithm combines the fraction of adverse forecasts with the reliability curve to compute the fraction of correct forecasts. These two fractions are modeled as beta-distributions for predicted probabilities in the interval (0, 1) and then combined with a business model in order to compute the financial results expected for hedging on forecast. The Hedge Advisor supplies expected results as a function of the predicted probability and the size and cost of the hedge.
The WCS forecast system is sufficiently skillful that hedging on tercile forecasts of adverse conditions provides favorable expected values of operating return and reduced volatility compared to simply accepting the adverse conditions.
The World Climate Service is a joint enterprise of Prescient Weather Ltd and MeteoGroup. The research was supported in part by a NOAA Small Business Innovation Research (SBIR) grant.