Intensive and extensive margins of the peak load: Measuring adaptation with mixed frequency panel data

In this work 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.