Local Temperature Effects on Locational Marginal Prices in the California Wholesale Electricity Market

Undergraduate Honors Thesis

Citations

Citeable URL: https://scholar.colorado.edu/concern/undergraduate_honors_theses/ks65hd90q

Abstract

This paper quantifies the effect that local daily average temperatures have on the daily average locational marginal price (LMP) in California’s wholesale electricity market. The LMP data is obtained from the California Independent System Operator (CAISO) for a period from October 2020 to October 2023. Weather station data is obtained from the National Oceanic and Atmospheric Administration (NOAA) for the same period. The LMP nodes are assigned weather station data using the Haversine Distance formula. The temperature effect is then estimated using a linear, quadratic, and binned two-way fixed effects regression controlling for both node and time fixed effects. The linear model indicates that a one degree increase in the local daily average temperature results in an increase of $0.85/MWh in the daily average locational marginal price. The quadratic model shows a decreasing marginal effect of temperature on price until approximately 68 degrees Fahrenheit, after which the marginal effect increases. The binned regression model was the most flexible showing that temperatures below 45 degrees Fahrenheit and above 80 degrees Fahrenheit had significantly greater locational marginal prices compared to when temperatures are between 65- and 75-degrees Fahrenheit. These results will have implications on the decision making within both the public and private sectors and influence the debate between nodal and zonal market structures.

Creator