The Capacity Factor Delta: Equity Market Reaction to Weather-Induced Power Outages in Electricity-Generating Firms

Abstract

This paper employs a quasi-experimental event study design that analyzes the equity market reactions to severe weather events in electricity-generating firms via average cumulative abnormal returns and dynamic average treatment effects on the treated (ATT). It uses a novel treatment identification strategy by assembling a treatment zone of severe weather events using individually reported storm locations. Treatment is assigned to power plants within 100 miles of the path of the power-outage inducing storm, then traced to firms for the treatment group via ownership data. The findings are as follows: [1] The average cumulative abnormal returns for both the treatment group firms and the control group firms were significant, at -1.57% and -1.09%, respectively, indicating a negative equity market reaction to severe weather events. [2] The treated renewable firms (-2.38%) earned significantly lower cumulative abnormal returns as compared to the control group of renewable firms. [3] Asymmetrically, the control group fossil fuel firms earned significant lower cumulative abnormal returns (-2.43%) as compared to the fossil fuel treatment group. [4] The ATT for event-day 20 was significant across all observations, renewable firms, and fossil fuel firms, indicating significant positive abnormal return ATTs for the treatment group of 0.24%, 0.11%, and 0.37%, respectively. Findings [1] and [2] support the hypotheses of the study that treated groups would underperform control groups and that renewable energy firms would outperform fossil fuel firms. Findings [3] and [4] oppose the hypotheses of the study but could be explained by extrapolatory beliefs and stimulatory effects of emergency stimulus efforts to restore the grid.