How Physical Climate Risks Impact the Risk Linkage of the Electricity Industrial Chain

Engineering notes

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Chinese explanation / 中文解读

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Original abstract

The physical risks of climate change are transmitting shocks along the entire electricity industrial chain, disrupting the cross-sectoral interdependencies between them. This study measures dynamic risk linkage across the upstream, midstream, and downstream segments of China’s electricity industry chain using the DCC-GARCH model. Then, the MF-VAR model is used to investigate the impact of physical climate risk on the electricity power industry chain. The results reveal that the risk linkage network of China's electricity power industry chain exhibits significant heterogeneity. Upstream-midstream and upstream-downstream linkages are primarily characterized by negative risk hedging, whereas midstream-downstream connectedness displays positive risk synergy. Furthermore, different types of physical climate risks affect risk linkage within the power industry chain through distinct short-term impact pathways. Specifically, extreme temperatures and droughts influence upstream-midstream linkages by altering the power generation mix, whereas extreme rainfall directly disrupts midstream-downstream linkages through physical grid failures. In contrast, when these individual physical risks are aggregated into a comprehensive index, a rise in that index enhances overall risk co‑movement. Moreover, the impacts of climate risk on segment returns are asymmetrical, with the midstream generation segment as the core value-loss zone and main vulnerability. These findings provide policy guidance to enhance climate adaptability and prevent cross-segment risk transmission.

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