Climate change - lower electricity prices and increasing demand. An application to the Nordic Countries

Abstract:\nConcentration of greenhouse gases in the atmosphere influences the climate, which then alters the\namount of primary energy for countries or regions where hydropower and wind power constitute\nimportant parts of the energy supply. Besides, the demand effect of temperature increases may be\nlarge in economies where heating and air-conditioning demand a large share of total energy. In this\narticle, we apply climate change calculations from natural science and detailed inflow data from the\nauthorities to estimate the change in primary energy supply of the hydropower-dominated Nordic\nelectricity market. The estimated inflow model shows an increase in primary inflow in the next 40\nyears of 6–15% in the Nordic countries. An estimated temperature model shows a 2–4% initial drop\nin demand in the same time period, because of increasing temperature. Within the context of a\nperfect-competition electricity market model, we simulate the total market outcome. As primary\nsupply increases, the production cost decreases, prices drop and the total demand increases as the\nprice effect dominates the temperature effect. Since the hydropower plants are located away from\nlarge consumer groups, the stress on the transmission networks is dramatic for some regions, which\nin the next phase may trigger new investments in transmission network capacities.