Wind power forecasting for projection times of 0–48 h can have a particular value in facilitating the integration of wind power into power systems. Accurate observations of the wind speed received by wind turbines are important inputs for some of the most useful methods for making such forecasts. In particular, they are used to derive power curves relating wind speeds to wind power production. By using power curve modeling, this paper compares two types of wind speed observations typically available at wind farms: the wind speed and wind direction measurements at the nacelles of the wind turbines and those at one or more on-site meteorological masts (met masts). For the three Australian wind farms studied in this project, the results favor the nacelle-based observations despite the inherent interference from the nacelle and the blades and despite calibration corrections to the met mast observations. This trend was found to be stronger for wind farm sites with more complex terrain. In addition, a numerical weather prediction (NWP) system was used to show that, for the wind farms studied, smaller single time-series forecast errors can be achieved with the average wind speed from the nacelle-based observations. This suggests that the nacelle-average observations are more representative of the wind behavior predicted by an NWP system than the met mast observations. Also, when using an NWP system to predict wind farm power production, it suggests the use of a wind farm power curve based on nacelle-average observations instead of met mast observations. Further, it suggests that historical and real-time nacelle-average observations should be calculated for large wind farms and used in wind power forecasting. Copyright © 2011 John Wiley & Sons, Ltd.