Measuring wholesale electricity price risk from climate change: Evidence from Portugal

The increasing widespread utilization of renewable energy sources, especially those reliant on the weather, coupled with the effects of climate change, is making electricity markets more sensitive to weather conditions. Portugal relies heavily on hydropower for its domestic energy generation. With its robust VAR approach, this study aims to comprehend how water resource variations due to precipitation patterns or reservoir levels influence price dynamics in the wholesale electricity market. By investigating whether these price increases are associated with temperature variations and considering the impact of temperature on both electricity demand and the availability of water resources for power generation, we provide crucial insights into the vulnerability of the electricity system to hydrological uncertainties. These findings can help stakeholders, including policymakers and industry professionals, develop effective strategies to manage price fluctuations. Understanding these relationships is critical to informed decision-making regarding resource allocation, energy market regulations, and infrastructure planning to mitigate the impact of climate-induced changes on electricity prices.