Intensive and Extensive Margins of the Peak Load: Measuring Adaptation with Mixed Frequency Panel Data
Electricity reliability hinges on power systems’ ability to satisfy peak loads, which are often driven by heating and cooling demands. As air conditioning (AC) usage grows worldwide, particularly in emerging nations with higher temperatures and rising affluence, extreme temperature events can cause cooling-driven electricity demand to exceed system capacity, compromising reliability and potentially causing mortality and morbidity. This study examines how daily peak load responds to daily maximum temperatures in Europe and India, taking into account both short-run intensive margin adjustments in the utilization of the existing cooling capital stock, and long-run extensive margin adjustments in AC ownership. These load responses are then projected into the future using daily maximum temperatures from 25 global climate models, offering estimates of changes in electricity usage in these regions by mid-century.
A new proposed methodology catches both slow-evolving climatic alterations and fast responses to weather anomalies, shedding light on climate change adaptation. Compared to past climatic trends, we show that rises in average maximum temperatures, as well as the unanticipated variations around those norms, can intensify the pressure on peak electricity consumption in Europe and India. Our extensive margin-focused model projects significantly larger relative shifts in peak demand by 2050 as a result of both short-term weather-related responses and long-term climate adaptations. This highlights the fact that the extensive margin is where most adaptation to climate change in energy consumption happens. This has not been as thoroughly investigated in earlier research that only looked at peak load data, underscoring the significance of taking household and billing data into account. Additionally, our strategy of utilizing long-term climate effects and income modulation as stand-ins for extensive margin modifications works well when precise air conditioning data is unavailable.
We investigate the response of daily electricity peak load to daily maximum temperatures across states in Europe and India. We propose a method that decomposes short- from medium/long-run effects, retains the high-frequency nature of the load-weather covariation, and treats economic growth as a modulating factor. By simultaneously exploiting variation in unexpected daily weather anomalies and decade-long climatic changes in each location we decompose transitory - intensive margin - adjustments from permanent - extensive margin - adjustments. We find that the shocks over the long run differ substantially from the short-run dynamics. Furthermore, we find evidence that per capita income modulates the adjustments over the short- and long-run. We project that in response to climate change around 2050 the peak load may increase by up to 20%-30% in Southern Europe and in several states in India, depending on the degree of warming and the evolution of socio-economic conditions. Even with a limited scope to two world regions, we identify that the structure of the economy and differences in future income growth matter in shaping the adaptation to climate change. Our decomposition allows to identify how future weather anomalies can further amplify the relative increase associated to the shift in the climate norm. Assuming that the interannual variability of maximum temperatures follows the distribution observed in the past, we find a doubling of the impacts of climate change during the summer in Europe. Uncertainty around the distribution of future weather anomalies may lead to further unexpected peak load amplifications. Our results have important policy implications for power systems’ generation capacity, transmission and storage, as we show that the challenges to accommodate the peak load in days with extreme temperatures may substantially increase already around mid-century.