Working Paper: NBER ID: w26441
Authors: Chen Lin; Thomas Schmid; Michael S. Weisbach
Abstract: Extreme temperatures lead to large fluctuations in electricity demand and wholesale prices of electricity, which in turn affects the optimal production process for firms to use. Using a large international sample of planned power plant projects, we measure the way that electric utilities’ investment decisions depend on the frequency of extreme temperatures. We find that they invest more in regions with more extreme temperatures. These investments are mostly in flexible gas and oil-fired power plants that can easily adjust their output, to improve their operating flexibility. Our results suggest that climate change is becoming a meaningful factor affecting firms’ behavior.
Keywords: Climate Change; Corporate Investment; Operating Flexibility
JEL Codes: G30; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the frequency of extreme weather days (Q54) | Increased investments in flexible power plants (L94) |
| Extreme weather conditions (Q54) | Increased investments in flexible power plants (L94) |
| Volatility of electricity demand and prices influenced by extreme weather (Q47) | Increased investments in flexible power plants (L94) |
| Higher electricity price volatility resulting from more extreme weather (Q54) | Planned investments in flexible generation (G31) |
| Extreme weather conditions (Q54) | No significant effect on investments in inflexible or renewable plants (G31) |