Climate change - lower electricity prices and increasing demand. An application to the Nordic Countries
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- Discussion Papers [1002]
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Abstract:
Concentration of greenhouse gases in the atmosphere influences the climate, which then alters the
amount of primary energy for countries or regions where hydropower and wind power constitute
important parts of the energy supply. Besides, the demand effect of temperature increases may be
large in economies where heating and air-conditioning demand a large share of total energy. In this
article, we apply climate change calculations from natural science and detailed inflow data from the
authorities to estimate the change in primary energy supply of the hydropower-dominated Nordic
electricity market. The estimated inflow model shows an increase in primary inflow in the next 40
years of 6–15% in the Nordic countries. An estimated temperature model shows a 2–4% initial drop
in demand in the same time period, because of increasing temperature. Within the context of a
perfect-competition electricity market model, we simulate the total market outcome. As primary
supply increases, the production cost decreases, prices drop and the total demand increases as the
price effect dominates the temperature effect. Since the hydropower plants are located away from
large consumer groups, the stress on the transmission networks is dramatic for some regions, which
in the next phase may trigger new investments in transmission network capacities.