How do weather events affect energy investments?

How do weather events affect energy investments? 

The relationship between weather events and energy investments is a multifaceted one. Different types of weather—be it temperature swings affecting demand, wind and solar patterns influencing renewable generation, or extreme events like hurricanes and droughts—can introduce volatility, risk, and sometimes opportunity into energy markets. From daily fluctuations to extreme climate phenomena, the weather influences investment decisions across the energy sector. 

While renewable energy is most intrinsically linked to the weather due to its requirement for weather activity to generate power, fossil fuels are also influenced by the weather. Changing climates also underscore the need for robust risk assessment and adaptation strategies in a rapidly evolving world. 

The fundamental link: weather, energy demand, and supply 

The weather, supply and demand are intrinsically linked, the weather can both increase power demand and restrict the amount of power generated.  

How temperature affects heating and cooling demand 

The weather can affect the demand for energy, putting extra strain on the network due to extreme weather events such as heat waves or cold snaps. In the case of heatwaves, houses and businesses have increased cooling demands, which require more energy. In the case of fossil fuels this can increase the price of energy, particularly in the event of geopolitical issues, which can cause bottlenecks in energy provision. In the case of renewable energy, heatwaves can cause solar arrays to shut down and stop generating power. Solar panels can only generate energy at 23 degrees or below. Cold spells can also increase energy demand due to increased heating requirements, meaning renewables may struggle to meet demand.  

Impact of wind speed on wind power generation 

For wind energy to be generated, wind turbines require wind. Sometimes a lack of wind occurs, known as a wind drought, which is caused by high-pressure activity. When wind droughts occur, they can lead to demand and supply issues for wind farms. Conversely, when wind activity levels are too high, excessive energy can be generated, overwhelming the grid with power. To avoid this, forced shutdowns may be enforced to prevent over-generation of energy, although battery storage could be a useful solution to this issue.  

Solar irradiance and photovoltaic output 

Photovoltaics are impacted by the amount of sunlight that reaches the solar panels, which can be affected by the weather's behaviour. Cloud cover can restrict the sun's rays from reaching solar arrays, preventing the required 400- to 800-nanometre wavelength range needed for solar panels to operate at full capacity. 

Precipitation levels and hydropower generation 

Water is necessary to generate hydropower, but excessive water can also impact the efficiency of hydropower. Rising reservoir levels can cause flooding, which can overload hydroelectric systems. In the case of insufficient water, the movement of water required to generate hydroelectricity cannot occur, which reduces the capacity of a hydroelectric plant.  

Climate change: a long-term investment challenges and opportunities

Climate change is reshaping the global investment landscape, creating both significant risks and new opportunities for long-term investors. The rising frequency and intensity of extreme weather events—from storms to ice and snow—pose increasing challenges for infrastructure built to support both fossil fuel and renewable energy projects.

Investment risks in a changing climate

Most large-scale energy solutions, including wind turbines, solar farms, and fossil fuel plants, are located in exposed outdoor environments. As a result, they must withstand the growing stress of severe weather. This leads to higher costs for materials, maintenance, and repairs. For example:

• Wind turbines face damage from ice accumulation and high winds.

• Power distribution networks, including overhead power lines, are vulnerable to storms and heavy snow.

• Fossil fuel assets face an additional challenge: the long-term risk of becoming stranded assets as the world shifts toward net-zero energy solutions.

These risks mean that investors must carefully evaluate the resilience and adaptability of energy infrastructure when making long-term investment decisions.

Opportunities in renewable energy investment

Despite the risks, climate change also creates unique investment opportunities. Shifts in long-term weather patterns can enhance the value of renewable energy:

• Warmer winters may reduce extreme cold damage, lowering maintenance costs for renewable systems.

• Extended sunlight hours in colder months could boost the productivity of solar power plants.

• The growing global demand for resilient and adaptable energy solutions positions renewable energy as a strong long-term growth sector.

Why should investors should focus on resilience?

The future of energy investment lies in building climate resilient infrastructure that can adapt to unpredictable weather. Investors who prioritise sustainable and adaptive energy projects will not only reduce risk but also capture the upside of a rapidly changing energy landscape.

Impacts on renewable energy investments 

The variability and intermittency of power generation, both on a fossil fuel and renewable basis is exacerbated by weather extremes. 

Technological advancements for weather resilience, including battery storage and smart grids 

The role of smart grids in maintaining plants in extreme weather conditions is a key one, particularly in regards to building grid resilience. Sensors, forecasting algorithms and batteries are all methods of monitoring power sources so that predictive maintenance can occur ahead of machine shutdown or error. Through monitoring and analytics, distribution can be tweaked and moved in real-time, combating issues such as surges linked to weather conditions or energy spikes.  

Geographical diversification as a risk mitigation strategy 

Different areas can yield better conditions than others for power plants, with extreme cold affecting fossil fuel production, extreme precipitation affecting hydropower and lack of wind affecting wind farms. Choosing a region with weather patterns that are beneficial to the type of renewable energy can yield higher outputs and make a project more economically viable. 

On a more local level, spreading out renewable energy plants over a wider area can help capture the slight variation in weather patterns within a certain region, with one area generating solar energy in the sunshine while another area experiences rain and a lack of sunlight, without the need for long transmission distances to finance.  

Mitigating weather-related investment risks 

Risk related to the weather and its impact on power generation can be combatted, thanks to monitoring and analytics.  

Advanced weather forecasting and climate modelling 

As the Earth and its weather activity evolve due to climate modelling, it’s key that historical climate data is integrated into energy modelling and forecasting models to help predict how changing weather patterns may affect plants and energy output. Studying historical weather data, distribution, transmission, and generation statistics, and the performance of existing power plants could hold the key to accurately forecasting how the weather might affect output and how to mitigate issues before they occur.  

Investment in resilient infrastructure and grid modernisation  

One of the key challenges in power generation is weatherproofing technology to give the plants longevity. Predictive maintenance also helps prevent damage to equipment before it occurs; however, in extreme working environments, conditions may be too hazardous for human engineers to undertake repairs. The downtime caused by machine failure due to extreme weather can then lead to energy bottlenecks and higher energy prices.  

Some businesses may use diversification of energy portfolios or financial instruments for hedging against weather risk. Flexible Power Purchase Agreements (PPAs) which fix energy at a certain price fora long period, allow investors in renewable energy to spread the risk of one type of energy source, for example combining the consumption of fossil fuels, solar or wind to hedge against the risk that one of the three will fail or see price increases due to weather-related incidents.  

It's clear that for the energy market to weather the storm of extreme weather, government policy and regulatory frameworks must adapt to encourage climate adaptation, such as the relaxation of regulatory burdens to include financial incentives for weatherproofing or maintaining equipment.