NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Climate Change, Operating Flexibility and Corporate Investment Decisions

Chen Lin, Thomas Schmid, Michael S. Weisbach

NBER Working Paper No. 26441
Issued in November 2019
NBER Program(s):Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w26441

 
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