Managing the electric power sector’s physical and financial exposure to extreme weather and climate events


Impact of drought on utility costs under different scenarios.

The U.S. electric power industry is increasingly cognizant of its vulnerability to extreme weather. Extreme temperatures (heat waves, cold snaps) are associated with spikes in electricity demand. Hydrologic extremes (especially drought) can also disrupt power system operations. Drought impacts power systems in two main ways: 1) it reduces hydropower production via lower streamflow; and 2) it disrupts operations at steam-based thermal power plants (nuclear, coal and even natural gas) that require large quantities of cooling water.

The latter primarily occurs when a combination of low streamflow and high air temperatures contribute to prohibitively high water temperatures in the cooling water source. High enough water temperatures can exhaust the ability of a thermal power plant’s cooling system to absorb waste heat without depleting available water resources or violating regulatory constraints on thermal effluent temperatures. When utilities lose hydropower production (and potentially baseload thermal generation) due to drought, this can dramatically increase the cost of providing electricity (figure above) and threaten system reliability– it can even impact shareholders of publicly traded electric companies (figure below).

Utility shareholders’ associated return on equity.

Although coincident periods of high demand (heat waves) and water scarcity (drought) have historically posed the most problems for utilities, a new challenge– overabundance— is already emerging, thanks to the rise of variable renewable energy technologies like wind and solar. During periods of low demand, high water availability, and high availability of renewables, power system operators may have no choice but to forcibly curtail wind and solar providers, at significant financial cost.

Our research aims to help build and manage power systems of the future that can absorb extremes on both ends of the spectrum — scarcity and abundance. Alongside physical solutions (e.g., energy storage), another key tool that we’re interested in is the use of financial risk mitigation (i.e., insurance or risk pooling) to help manage the financial consequences of extreme amounts of energy on the grid.

Relevant Papers:

Su, Y., Kern, J.D., Reed, P., Characklis, G. (2020). “Compound Hydrometeorological Extremes Across Multiple Timescales Drive Volatility in California Electricity Market Prices and Emissions”. Applied Energy.

Kern, J.D., Su, Y., Hill, J. (2020). “A retrospective study of the 2012-2016 California drought and its impacts on the power sector.” Environmental Research Letters. 15 094008

Su, Y., Kern, J., Denaro, S., Hill, J., Reed, P., Sun, Y., Cohen, J., Characklis, G. (2020). “An open source model for quantifying risks in bulk electric power systems from spatially and temporally correlated hydrometeorological processes” Environmental Modelling and Software. Vol. 126.

Kern, J.D., Characklis, G. (2017). “Evaluating the Financial Vulnerability of a Major Electric Utility in the Southeastern U.S. to Drought under Climate Uncertainty and an Evolving Generation Mix.” Environmental Science and Technology. Vol. 55(15), pp. 8815-8823.

Su, Y., Kern, J.D., Characklis, G. (2017). “The Impact of Wind Energy Growth and Hydrological Uncertainty on Financial Losses from Generation Oversupply in Hydropower Dominated Systems.” Applied Energy. Vol. 194, pp. 172-183.

Kern, J.D., Characklis, G.W., Foster, B. (2015). “Natural Gas Price Uncertainty and the Cost Effectiveness of Hedging Against Low Hydropower Revenues Caused by Drought.” Water Resources Research. Vol. 51, No. 4, pp. 2412-2427.

Foster, B., Kern, J.D., Characklis, G.W. (2015). “Mitigating Hydrologic Financial Risk in Hydropower Generation Using Index-Based Financial Instruments.” Water Resources and Economics. Vol. 10, pp. 45-67.