The risks posed by water stress to the energy sector and in particular to hydroelectricity generation have received little attention in the academic literature, yet they are important to understand because hydropower is a central piece in the low-carbon transition puzzle and the effects of climate change on water availability will determine the effectiveness of hydropower projects. This paper studies the impact of reduced water availability on hydroelectricity generation in Europe and the United States.

The authors match information on the location of hydropower plants with information on water risk and historical precipitation. They consider changes in hydropower generation in 2021 – a low-rainfall year – compared with the historical average. They find that plants located in basins with a higher exposure to water-related risks produced less electricity than their historical average compared with plants located in less risky basins. They also examine changes in precipitation over time and find that an increase in precipitation is associated with higher levels of electricity generation.

These results show that water stress is material to hydroelectricity generation and can be used to provide estimates of the effect of water stress on hydropower generation for high-income economies. This is important because much of the literature on economic impacts on natural resource scarcity is focused on developing economies, arguably because they have a higher dependence on their natural resource base. However, it is important to note that vulnerabilities related to natural resources also exist in developed economies.

The estimates in the paper can be used for planning hydropower output as one way to decarbonise energy supply, as well as for calibrating economy-wide models of climate change that include hydroelectricity production. The paper also provides a framework for understanding the impact of other forms of environmental risks on different sectors and economic activities.

Key points for decision-makers

  • Existing hydropower plants are the largest source of low-emission electricity globally and the International Energy Agency estimates that hydropower capacity could double by 2050, representing about 15% of total electricity generation in its net zero scenario.
  • Changes in water availability that reduce the generating capacity of hydropower plants might hinder the transition to a low-carbon economy. Failing to account for these risks in forward-looking risk assessments could lead to a rapid financial revaluation of the firms and economic activities exposed to such risks.
  • To the authors’ best knowledge, this is the first paper to provide a multi-country analysis of the impact of changes in water availability on hydroelectricity generation at the plant level in high-income economies and using location-specific information on water-related risks and hydro-meteorological data.
  • They find that hydroelectric plants located in riskier water basins produced less electricity in 2021, a low-rainfall year, than their historical average (2015–2020) compared with plants located in less risky basins.
  • An increase in precipitation is associated with higher levels of electricity generation.
  • The empirical strategies adopted in the paper offer a framework that can be replicated across similar datasets for other nature-related risks.
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