Climate Change, Operating Flexibility and Corporate Investment Decisions
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.
We are very grateful to David Weisbach, Hayong Yun, seminar participants at University of Chicago, the Shanghai Advanced Institute of Finance, the Shanghai University of Finance and Economics, and conference participants at the 2018 Summer Finance and Accounting Conference in Jerusalem and the 2019 University of Oklahoma Energy and Commodities Finance Research Conference for helpful suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.