The impact of heat waves on electricity spot markets

Abstract

Thermoelectric power plants depend on cooling water drawn from water bodies. Low river run-off and/or high water temperatures limit a plant's production capacity. This problem may intensify with climate change. Our study quantifies the impact of forced capacity reductions on market prices, production costs, consumer and producer surplus, as well as emissions by means of a bottom-up power generation system model. First, we simulate the German electricity spot market during the heat wave of 2006. Then we conduct a sensitivity study that accounts for future climatic and technological conditions.We find an average price increase of 11% during the heat wave 2006, which is even more pronounced during times of peak demand. Production costs accumulate to an additional but moderate 16m. Due to the price increase, producers gain from the heat wave, whereas consumers disproportionately bear the costs. Carbon emissions in the German electricity sector increase during the heat wave. The price and cost effects are more pronounced and increase significantly if assumptions on heat-sensitive demand, hydropower capacity, net exports, and capacity reductions are tightened. These are potential additional effects of climate change. Hence, if mitigation fails or is postponed globally, the impacts on the current energy system are very likely to rise. Increases in feed-in from renewable resources and demand-side management can counter the effects to a considerable degree. Countries with a shift toward a renewable energy supply can be expected to be much less susceptible to cooling water scarcity than those with a high share of nuclear and coal-fired power plants.