Powering Through Drought: The Impact of Water Scarcity on Electricity Generation

Changing weather patterns pose a fundamental challenge to electricity systems reliant on water resources. Using two decades of plant-level generation and fuel input data matched to hydrological basins in Chile, we show that local droughts reduce hydro output by about 20% on average and trigger sharp increases in thermal generation among plants with spare capacity. This substitution cushions short-run losses in supply and guarantees reliability of the system but creates a double burden for affected regions, which face both water scarcity and increases in local pollution. At the aggregate level, emissions from high-capacity thermal plants rise by roughly 34% during system-wide droughts, corresponding to about 1.4--1.8% of annual national emissions and 5.5--6.5% of the power sector's total. We also document that prolonged droughts were followed by expansions in thermal capacity, consistent with long-run lock-in of high-carbon-intensity technologies. Together, these results provide quantitative benchmarks for infrastructure planning, highlight the risk of path dependence in investment under climatic stress, and underscore the importance of ensuring sufficient capacity, diversification, and resilience in power system planning.