Question 5

In your view, would it be beneficial for the Company to use forecasting

to plan their future business strategy?
Forecasting is a method or a technique for estimating many future aspects of a
business or other operation. Planning for the future is a critical aspect of
managing any organization including General Electric. Indeed, their typically
modest capital resources make such planning particularly important. In fact, the
long-term success of large organizations is closely tied to how well the
management of the organization is able to foresee its future and to develop
appropriate strategies to deal with likely future scenarios. Intuition, good
judgment, and an awareness of how well the industry and national economy is
doing may give the manager of a business firm a sense of future market and
economic trends. Nevertheless, it is not easy to convert a feeling about the
future into a precise and useful number, such as next year's sales volume or the
raw material cost per unit of output. Forecasting methods can help estimate
many such future aspects of a business operation.
Forecasting cannot be reduced to a mechanical exercise. Naive extrapolation or
fitting trends to past data is of limited value. It is because the future is not likely
to resemble the past that planning is needed. To supplement their judgement,
forecasters rely on a variety of data sources and forecasting methods. For
example, forecasts of the economic and industry environment may involve use of
econometric models which take account of interactions between economic
variables. In other cases the forecaster may employ statistical techniques for
analyzing and projecting time series. Forecasts of demand will partly reflect
these projections of the economic environment, but they may also be based on
formal models that marketing specialists have developed for predicting buyer
behavior or on recent consumer surveys to which the firm has access.
Forecasting

methods

have

many

practically

applications

for

business

establishments. For example, a number of important business decisions could

conceivably be affected by the forecasted sales of a given product. Production
schedules, raw material purchasing plans, policies regarding inventories, and
sales quotas will be affected by such forecasts. Given these stakes, it is vitally
important for the business to utilize accurate forecasting methodologies.

The firm will certainly want to review the actual sales data for the product in
question for past periods. Suppose that the forecaster has access to actual sales
data for each quarter over the 25-year period the firm has been in business.
Using this historical data, the forecaster can identify the general level of sales.
He or she can also determine whether there is a pattern or trend, such as an
increase or decrease in sales volume over time. A further review of the data may
reveal some type of seasonal pattern, such as peak sales occurring before a
holiday. Thus by reviewing historical data over time, the forecaster can often
develop

an

accurate

understanding

of

the

previous

pattern

of

sales.

Understanding such a pattern can often lead to better forecasts of future sales of
the product. In addition, if the forecaster is able to identify the factors that
influence sales, historical data on these factors or variables can also be used to
generate forecasts of future sales volumes.
All forecasting methods can be divided into two broad categories: qualitative and
quantitative. Many forecasting techniques use past or historical data in the form
of time series. A time series is simply a set of observations measured at
successive points in time or over successive periods of time. Forecasts
essentially provide future values of the time series on a specific variable such as
sales volume. Division of forecasting methods into qualitative and quantitative
categories is based on the availability of historical time series data.

Question 9
In forecasting, it is known that forecasting results associate with
forecast errors. Discuss some implications of forecast errors which
impact to the Companys demand.
Measures

of

forecast

uncertainty

are

becoming

increasingly

important,

particularly in terms of how the forecast uncertainty integrates with conventional

generation and load forecasting issues. Probabilistic tools that evaluate the
impact on balancing resources of load variability and wind generation
uncertainty, as well as unexpected generation outages, are needed and should
eventually be integrated into Energy Management System (EMS) environments in
the control room.
For General Electric, forecast error for wind plant output predictions can be
measured in many different ways. One common measurement is the Mean
Absolute Error (MAE), which is simply the absolute value of the error, divided by
the predicted or reference value. Another is Root Mean Squared Error (RMSE),
which is similar but penalizes larger errors more than smaller errors. It is
common practice to measure the error of the power with reference to the rated
(nameplate) value rather than the predicted or actual value. There is logic to
this, as an error of just a few megawatts during a period of low output would
otherwise be inappropriately magnified. While results are highly dependent on
the site, time of year, quality of turbine availability/outage data, weather
conditions and other situations, typical one-hour-ahead power MAE values for a
single wind power plant are in the range of 4-12 percent of rated capacity. Typical
one-day-ahead values may be in the range of 12-25 percent of rated capacity,
with results dependent on geography, facility dispersion, and forecast method.
For a diverse set of wind plants in a broad geographic region (spread over
hundreds of miles), the aggregate error will be significantly reduced perhaps by
up to 50 percent.

The forecast error may be also reflected in the day-ahead commitment schedule
and prices, and issues around responsibility for deviations from the forecast must
be considered (for example, is it appropriate to uplift this forecast error financial
impact to the entire marketplace). So while more investigation on risk analysis
and cost allocation may be needed, the value of incorporating the wind (and
eventually, solar) power forecast into unit commitment planning is so substantial
from both an economic and reliability point of view that such investigations
should be pursued with some urgency. When the unit commitment process is
decentralized or bilateral, creating transparency and continuity in dispatch is
challenging. Parties marketing and scheduling generation (variable or otherwise)
consider their scheduling plans market-sensitive information and therefore there
is often no transparency to other market participants or even to system
operators beyond very short term scheduling windows. Beyond concerns about
market sensitivity, the generation schedulers often view the risk proposition
differently than system operators. Schedulers often apply experience to forecast
results, but those experiences and the risks that they are hedging against may
not be the same that would concern a system operator. This should be expected,
since an efficient economic outcome from the standpoint of a scheduler is often
achieved through maintaining maximum optionality and flexibility, while system
operators seek to understand and capture uncertainty in order to diagnose and
then treat potential reliability risks by maintaining sufficient access to generation
to respond to those risks.
The market participants, and particularly the wind power producers, could clearly
make better use of forecast information, as the forecast error decreases with a
shorter time horizon.