Solar Activity and Economic Fundamentals: The Case of the Electricity Market in Texas

The 19th century English economist William Stanley Jevons, the co-developer of the neoclassical theory of consumer theory, also developed a theory that business cycles were related to the sunspot cycle. His reasoning was that changes in sunspot activity affected crop output and prices that in turn affected overall economic activity. Unfortunately for Jevons' reputation, the evidence to support his theory was weak at best and the theory was eventually discredited, so much so that the term “sunspot variable” in econometrics refers to a variable that has no effect on economic fundamentals. The sunspot cycle had been discovered in 1843 by the German amateur astronomer Schwabe, hence it was rather new and in vogue when Jevons presented his business cycle theory in 1875. During this same period, researchers realized that disturbances in Earth's magnetic field (called "geomagnetic storms") could be statistically linked to this new sunspot cycle.

Similar to the economists contempt of “sunspots”, physical scientists now understand that the sunspot cycle is neither a reliable quantitative measure, nor is it the physical driver of solar activity. Arguably, sunspots remain the best known public manifestation of our magnetically-variable star, but they are of little value to NOAA's forecasters of "space weather".

Technologists now recognize a multitude of societal impacts caused by solar variability. Foremost among the affected systems is the power grid, where electricity transmission and the operation of transformers can be severely impeded by geomagnetic storms.

In this paper we present a theory and provide some supporting evidence that solar activity has an impact, not on an economic fundamental such as crop output, but on the electricity market. The starting point of the paper is the documented evidence that geomagnetic storms can impair the performance of transformers. The paper examines the economic impact of this activity by drawing on data from the ERCOT power grid (the power grid that serves the vast proportion of Texas) over the period 1 April 2003 through 31 December 2003. This power grid is one of the few markets that releases data on what are known as “scheduling control errors.” A positive scheduling control error ( measured in MW) occurs when generators supply more electricity to the grid than scheduled. A negative scheduling control error occurs when the amount supplied is less than scheduled. Econometric modeling indicates that geomagnetic storms can contribute to negative scheduling control errors. One possible explanation for this is that the transformers used to step up the electricity onto the high voltage transmission lines of the power grid are impaired by the storms ERCOT responds to the market imbalances associated with scheduling control errors through the deployment of regulation (regulation refers to power that can be dispatched via load frequency control), balancing services, and spinning reserves. The magnitude of the geomagnetically induced deployments are assessed using an econometric model that takes into account load, load forecasting errors, and atmospheric conditions. Geomagnetically induced currents are proxied by the rate of change in horizontal component of the geomagnetic field (obtained from the Del Rio Geomagnetic Observatory in Texas) The results of the analysis suggest that while sunspots may not impact economic fundamentals, solar induced geomagnetic storms do, at least in the electricity market in Texas.