Climate Change, Operating Flexibility, and Corporate Investment Decisions
Charles A. Dice Center Working Paper No. 2019-26
49 Pages Posted: 4 Nov 2019
Date Written: October 31, 2019
Extreme temperatures lead to large fluctuations in electricity demand and wholesale prices of electricity, which in turn affects the optimal production process for firms to use. Using a large international sample of planned power plant projects, we measure the way that electric utilities’ investment decisions depend on the frequency of extreme temperatures. We find that they invest more in regions with more extreme temperatures. These investments are mostly in flexible gas and oil-fired power plants that can easily adjust their output, to improve their operating flexibility. Our results suggest that climate change is becoming a meaningful factor affecting firms’ behavior.
Keywords: climate change, extreme temperatures, firm investment, operational flexibility, electricity generation, power plants
JEL Classification: G30, G31
Suggested Citation: Suggested Citation