Renewable energies impacting the optimal generation mix: The case of the Iberian Electricity Market

In the last few decades, electricity markets have undergone extensive reforms. A process of liberalizing electricity markets has been implemented by several countries, reducing the incumbents' market power. Thus, generation and retail are open to competition, while transmission and distribution remain regulated. Furthermore, the need to comply with the targets set by the Kyoto Protocol has boosted the installed capacity of renewable energy sources, such as wind power. Therefore, it is important to study what the impact of a renewable source like wind power will be on the optimal generation capacity mix, assuming producers can invest in other technologies and the wholesale market is open to competition. In this article, we assume two alternative generation technologies – wind and combined cycle gas turbines – as a simplifying assumption. We develop a two-stage model for the Iberian Electricity Market, where the choice of the capacity construction occurs in the first-stage, before electricity demand is known, and the optimal outputs and daily equilibrium prices are obtained in the second-stage, under the assumption that electricity demand does not exceed installed capacity. The application of this model reveals that producers can be expected to increase their renewable generation capacity (wind power).