Weather conditions, climate change, and the price of electricity

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.