Has renewable energy induced competitive behavior in the Spanish electricity market?

Abstract

Recent energy policy has favored a massive introduction of Renewable Energy Sources on electricity markets, which has greatly impacted their performance. First, the electricity price has decreased as a consequence of the so-called merit-order effect. Another relevant effect is associated to the intermittent nature of Renewable Energy, which has increased the cost of ancillary services. A third and important aspect, less addressed in the literature, is the induced change in the strategic behavior of the conventional electricity producers. In principle, the entry of new generators in a concentrated market would make it more competitive and change the strategic behavior of the incumbents. We test this hypothesis for the Spanish wholesale market. While we find no significant change in behavior for Nuclear, Hydropower and Coal, a change is observed in Combined Cycle bidding strategies after the entry of renewable generators. Our analysis shows that the massive entry of Renewable Energy Sources made other generators' behavior more competitive in the short run, but the effect was not persistent.