The effect of climate change on electricity expenditures in Massachusetts

Abstract

Climate change affects consumer expenditures by altering the consumption of and price for electricity. Previous analyses focus solely on the former, which implicitly assumes that climate-induced changes in consumption do not affect price. But this assumption is untenable because a shift in demand alters quantity and price at equilibrium. Here we present the first empirical estimates for the effect of climate change on electricity prices. Translated through the merit order dispatch of existing capacity for generating electricity, climate-induced changes in daily and monthly patterns of electricity consumption cause non-linear changes in electricity prices. A 2°C increase in global mean temperature increases the prices for and consumption of electricity in Massachusetts USA, such that the average household’s annual expenditures on electricity increase by about 12 percent. Commercial customers incur a 9 percent increase. These increases are caused largely by higher prices for electricity, whose impacts on expenditures are 1.3 and 3.6 fold larger than changes in residential and commercial consumption, respectively. This suggests that previous empirical studies understate the effects of climate change on electricity expenditures and that policy may be needed to ensure that the market generates investments in peaking capacity to satisfy climate-driven changes in summer-time consumption.