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Weather conditions, climate change, and the price of electricity

Author

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  • Mosquera-López, Stephania
  • Uribe, Jorge M.
  • Joaqui-Barandica, Orlando

Abstract

We estimate the effect of temperature, wind speed, solar radiation, and precipitation on wholesale electricity prices for six European countries, analyzing the full distribution of the weather variables. We provide evidence on nonlinear and extreme weather effects on electricity prices. In all countries, reductions in temperature below a certain threshold increase electricity prices, yet these thresholds tend to be lower for colder countries than for warmer ones. In addition, warmer countries have an upper threshold above which temperatures also increase prices. The precipitation threshold is near the maximum for countries with limited hydroelectric generation and much lower for others with high hydropower capacity, such as Norway. Wind speed has a similar effect on electricity prices across countries, while irradiance has a statistically significant effect in countries with the highest solar capacity and higher average irradiance. Ultimately, the impact of weather conditions on electricity prices is influenced by a country's initial climatic conditions, generation mix, policies, energy efficiency levels, and behavioral factors. Policies aimed at reducing the disproportionately negative impacts of climate change on vulnerable populations should ideally be informed by accurate quantification of the impact of weather on electricity prices.

Suggested Citation

  • Mosquera-López, Stephania & Uribe, Jorge M. & Joaqui-Barandica, Orlando, 2024. "Weather conditions, climate change, and the price of electricity," Energy Economics, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:eneeco:v:137:y:2024:i:c:s0140988324004973
    DOI: 10.1016/j.eneco.2024.107789
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    Cited by:

    1. Monika Zimmermann & Florian Ziel, 2024. "Spatial Weather, Socio-Economic and Political Risks in Probabilistic Load Forecasting," Papers 2408.00507, arXiv.org.

    More about this item

    Keywords

    Weather; Climate change; Electricity prices; Nonlinear effects;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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