Weather conditions, climate change, and the price of electricity

Abstract

We analyze the impact of temperature, wind speed, solar radiation, and precipitation on wholesale electricity prices in six European countries, considering the full distribution of these weather variables. Our findings show nonlinear and extreme weather effects on electricity prices. For instance, lower temperatures raise electricity prices in all countries, with colder countries having lower thresholds than warmer ones. Warmer countries also have an upper temperature threshold above which prices rise. The precipitation threshold is higher in countries with limited hydroelectric capacity and lower in those with high hydropower, like Norway. Wind speed consistently affects electricity prices across all countries, while solar irradiance is significant in countries with high solar capacity. Overall, the impact of weather on electricity prices depends on a country’s climate, energy mix, policies, efficiency levels, and behavioral factors. Effective policies to mitigate the adverse effects of climate change should be informed by a precise understanding of these impacts.

Orlando Joaqui Barandica

PhD Industrial Engineering

My research interests include energy markets, business analytics, quantitative finance, applied econometrics and statistical, and data visualization.