Weathering the Market : Analyzing the Impact of Climate Change on the Norwegian Electricity Market : A Price Volatility Time Series Analysis

Abstract

This thesis investigates the dynamics of the Norwegian electricity market, focusing on how hydro and wind generation affect average price levels and volatility. In addition, the analysis investigates how the increased occurrences of changed weather patterns due to climate change might affect these relationships. The research aims to explore the complex interplay between weather-dependent electricity sources and market prices, offering insights into how these elements interact within the different price areas in Norway. Methodologically, this study employs a statistical ARMA-EGARCH modeling framework to analyze the electricity market. The empirical findings indicate a statistically significant impact of increased hydrological balance and wind generation on reducing average price levels. However, the effects on price volatility present a contrast: an increased hydrological balance is associated with greater stability, while wind generation, explained by its intermittent nature, contributes to increased volatility. These results highlight the distinct influences of different renewable energy sources on market dynamics. The analysis reveals "inverse leverage effects" across all Norwegian price areas, underscoring the market’s greater ability in adapting to negative market shocks. A comparative analysis with a historical control period has highlighted a potentially increased influence of hydrological balance and wind generation on market prices. Looking ahead, given the projections on climatic and structural developments, this trend is anticipated to continue, potentially escalating risks and consequently, could diminish incentives for investments in production. The object of this study is to contribute to a better understanding of the complexities inherent in an electricity market dominated by renewable sources, and evolving climatic and structural changes.