Wind energy forecast error estimation using black & scholes mathematical model

Renewable sources of energy such as wind, have been focus of many studies in recent years. The clean and economic nature of renewable resources makes them very appealing candidates for the future´s energy planning, however the uncertain nature of them makes the integration process complicated. One method of dealing with this uncertainty is to use new storage technologies and the other way is to procure reserve dedicated to these renewable sources of energy. This paper suggests a method for wind producers to buy reserve from other non-renewable sources to mitigate the uncertainty. This paper investigates the usage of Black and Scholes mathematical model not only for pricing the options but also for estimating the amount of possible errors in wind energy forecast for a future time span. As far as the authors are aware of, such a novel approach has not yet been investigated. This method utilizes the concept of historic volatility in finance and introduces the historic volatility of wind energy which can be used for wind energy forecast error estimation. Further to the authors´ previous research on the use of “binomial tree” as both financial and energy forecast model, this research applies the Black and Scholes model and reports on the advantages of the latter.