Abstract:
This paper studies some impacts of climate change on electricity markets, focusing on three climate effects. First, demand for electricity is affected because of changes in the temperature. Second, changes in precipitation and temperature have impact on supply of hydro electric production through a shift in inflow of water. Third, annual plant efficiency for thermal generation and nuclear will decrease because the temperature of water used to cool technical equipment increases. To find the magnitude of these partial effects, as well as the overall effects, on Western European energy markets, we use a modified version of the multi-market equilibrium model LIBEMOD. We find that each of the three partial effects changes the average electricity producer price by less than 2 percent, while the net effect is an increase in the average electricity producer price of only 1 percent. Similarly, the partial effects on total electricity supply are small, and the net effect is a decrease of 4 percent. The greatest effects are found for Nordic countries with a large market share for reservoir hydro. In these countries, annual production of electricity increases by 8 percent, reflecting more inflow of water, while net exports of electricity doubles. In addition, because of lower inflow of water in summer and higher in winter, the reservoir filling needed to transfer water from summer to winter is drastically reduced in the Nordic countries.