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Economic and financial consequences of water risks: The case of hydropower

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  • Colesanti Senni, Chiara
  • Goel, Skand
  • von Jagow, Adrian

Abstract

Reduced water availability poses risks for many economic activities. This paper studies how water risks affect hydroelectricity generation in Europe and the US and whether these risks are priced in by financial markets. To this end, we build a novel dataset for the period 2015–2022, which combines plant-specific hydroelectricity generation with geo-specific water physical risks and equity returns. We find that water risks, measured using model-based aggregate water risk metrics as well as precipitation anomalies, are significantly associated with reduced electricity generation, although the effect disap- pears after two months. We then link the power plants in our sample to the equity returns of their owners to investigate whether financial markets adequately price water risks. Using a portfolio sorts approach, we find weak evidence of a negative risk pre- mium. Given the real negative effect of water risks on generation, we conclude that the lack of a positive risk premium amounts to mispricing of water risks by financial markets.

Suggested Citation

  • Colesanti Senni, Chiara & Goel, Skand & von Jagow, Adrian, 2024. "Economic and financial consequences of water risks: The case of hydropower," Ecological Economics, Elsevier, vol. 218(C).
    • Handle: RePEc:eee:ecolec:v:218:y:2024:i:c:s0921800923003117
    DOI: 10.1016/j.ecolecon.2023.108048
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    More about this item

    Keywords

    Hydroelectricity generation; Water risks; Risk premia; Geospatial data; Portfolio sorts; Financial risk; Mispricing;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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