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Renewable Generation Capacity and Wholesale Electricity Price Variance

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  • Erik Paul Johnson
  • Matthew E. Oliver

Abstract

The share of electric power generated from renewable energy sources such as wind and solar must increase dramatically in the coming decades if greenhouse gas emissions are to be reduced to sustainable levels. An under-researched implication of such a transition in competitive wholesale electricity markets is that greater wind and solar generation capacity directly affects wholesale price variability. In theory, two counter-vailing forces should be at work. First, greater wind and solar generation capacity should reduce short-run variance in the wholesale electricity price due to a stochastic merit-order effect. However, increasing the generation capacity of these technologies may increase price variance due to an intermittency effect. Using an instrumental variables identification strategy to control for endogeneity, we find evidence that greater combined wind and solar generation capacity is associated with an increase in the quarterly variance of wholesale electricity prices. That is, the intermittency effect dominates the stochastic merit-order effect.

Suggested Citation

  • Erik Paul Johnson & Matthew E. Oliver, 2019. "Renewable Generation Capacity and Wholesale Electricity Price Variance," The Energy Journal, , vol. 40(5), pages 143-168, September.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:5:p:143-168
    DOI: 10.5547/01956574.40.5.ejoh
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    1. Shrimali, Gireesh & Kniefel, Joshua, 2011. "Are government policies effective in promoting deployment of renewable electricity resources?," Energy Policy, Elsevier, vol. 39(9), pages 4726-4741, September.
    2. Lion Hirth, 2018. "What caused the drop in European electricity prices? A factor decomposition analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
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    Citations

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    Cited by:

    1. Timothy Weber & Bin Lu, 2023. "An Open-Source Energy Arbitrage Model Involving Price Bands for Risk Hedging with Imperfect Price Signals," Energies, MDPI, vol. 17(1), pages 1-31, December.
    2. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    3. Böttger, Diana & Härtel, Philipp, 2022. "On wholesale electricity prices and market values in a carbon-neutral energy system," Energy Economics, Elsevier, vol. 106(C).
    4. Simshauser, Paul & Newbery, David, 2024. "Non-firm vs priority access: On the long run average and marginal costs of renewables in Australia," Energy Economics, Elsevier, vol. 136(C).
    5. Maniatis, Georgios I. & Milonas, Nikolaos T., 2022. "The impact of wind and solar power generation on the level and volatility of wholesale electricity prices in Greece," Energy Policy, Elsevier, vol. 170(C).
    6. Irfan, Mohd, 2021. "Integration between electricity and renewable energy certificate (REC) markets: Factors influencing the solar and non-solar REC in India," Renewable Energy, Elsevier, vol. 179(C), pages 65-74.
    7. Lee, Zachary E. & Zhang, K. Max, 2023. "Regulated peer-to-peer energy markets for harnessing decentralized demand flexibility," Applied Energy, Elsevier, vol. 336(C).
    8. Yijian Ge & Lin Liu & Xilong Yao & Mohammad Aman Honardost & Ujunwa Angela Nwigwe, 2022. "Are There Conflicts among Energy Security, Energy Equity and Environmental Sustainability in China’s Provinces?," Sustainability, MDPI, vol. 14(11), pages 1-17, June.
    9. Kolb, Sebastian & Dillig, Marius & Plankenbühler, Thomas & Karl, Jürgen, 2020. "The impact of renewables on electricity prices in Germany - An update for the years 2014–2018," Renewable and Sustainable Energy Reviews, Elsevier, vol. 134(C).
    10. Nibedita, Barsha & Irfan, Mohd, 2022. "Analyzing the asymmetric impacts of renewables on wholesale electricity price: Empirical evidence from the Indian electricity market," Renewable Energy, Elsevier, vol. 194(C), pages 538-551.
    11. Diana Bottger & Philipp Hartel, 2021. "On Wholesale Electricity Prices and Market Values in a Carbon-Neutral Energy System," Papers 2105.01127, arXiv.org.
    12. Barsha Nibedita & Mohd Irfan, 2022. "Non-linear cointegration between wholesale electricity prices and electricity generation: an analysis of asymmetric effects," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(1), pages 285-303, February.
    13. Harker Steele, Amanda J. & Burnett, J. Wesley & Bergstrom, John C., 2021. "The impact of variable renewable energy resources on power system reliability," Energy Policy, Elsevier, vol. 151(C).

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    More about this item

    Keywords

    Wind power; Solar PV; Renewable energy generation capacity; Electricity price risk; Merit order; Intermittency;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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