Effect of stopping hydroelectric power generation on the dynamics of electricity prices: An event study approach

Supply shocks in electricity markets that disrupt energy production cause unexpected spikes in prices, which in turn have economic consequences, such as higher risk and therefore higher costs and losses for producers and consumers of electricity. One relevant shock in this sector is the halting of hydroelectric power generation due to the freezing of water reservoirs after the temperature drops below zero degrees Celsius, and therefore less efficient technologies such as thermal plants must begin to produce electricity. Using an event study approach, this shock in the Nord Pool market is explicitly identified, and the economic importance of expanding the interconnected market and the inclusion of more renewable sources in the generation mix of the system to smooth out price spikes is quantified. When a freezing event occurs, it is found that the average electricity prices increase (between (SIC)1 and (SIC)6), and that the negative relationship between temperature and prices also increases (for each degree that the temperature decreases, prices increase between (SIC)1 and (SIC)3). However, as expected, these changes are more pronounced in countries that are most dependent on hydropower generation. By identifying this supply shock, relevant insights are presented for market players, such as policy makers, investors, and consumers and producers, whose decisions are influenced by the effect of temperature, particularly when it causes the stopping of hydroelectric plants.