Beyond the merit order effect: Impact of the rapid expansion of renewable energy on electricity market price

Abstract

A drop in the average electricity market price owing to renewable energy with low marginal costs has been identified and explored as merit order effect. However, diffusion of variable renewable energy leads to concerns about the need for flexibility, decline of supply capacity, and volatility increase of electricity prices. For both decarbonization and stable electricity systems, understanding the drivers of market price is critical, but it is challenging because electricity markets are non-linear and affected by multiple factors. Hence, this research proposes a model based on machine learning techniques and explainable artificial intelligence (XAI) and estimates the multi-directional impact of renewable energy on the Japanese electricity market. The results reveal that the contribution of demand to market price is the largest, followed by solar generation and operable power facility capacity. This research identifies a large decline in the price triggered by solar power during the daytime; however, the effect of solar power varies by the time of day, season, and demand. Additionally, the results suggest that the market price increases when demand is high and solar generation is low, such as during summer evenings. Using XAI, this study quantitatively and visually demonstrated that interactions between solar power, demand, and operable power facility capacity are the key factors behind the high market volatility and price surge. It is important to manage the pace of plant installation and energy transition. Our study provides insights into how and when the market price changes with variable renewable energy and other policy-making factors.