Abstract
The change in the generation mix from conventional electricity sources to renewables has important implications for bidding behaviour and may have an impact on prices. The main goal of this work is to discover the role played by expected wind production, together with other relevant factors, in explaining the day-ahead market price through a data panel model. The Spanish market, given the huge increase in wind generation observed in the last decade, has been chosen for this study as a paradigmatic example. The results obtained suggest that wind power forecasts are a new key determinant for supply market participants when bidding in the day-ahead market. We also provide a conservative quantification of the effect of such trading strategies on marginal prices at an hourly level for a specific year in the sample. The consequence has been an increase in marginal price to levels higher than what could be expected in a context with notable wind penetration. Therefore, the findings of this work are of interest to practitioners and regulators and support the existence of a wind risk premium embedded in electricity prices to compensate for the uncertainty of wind production.
Highlights
Because of deregulation, the price for electricity has come to be determined by competitive bidding by producers and consumers in the wholesale day-ahead market, where an auction system is generally followed
The purpose of this work is to analyse the way in which the bidding strategies by generators have been conditioned by expected wind production, among other key variables, in the Spanish electricity day-ahead market
The average prices offered by CC and CT plants for a given hour have proved to be systematically higher when expected demand levels are low for the studied sample
Summary
The price for electricity has come to be determined by competitive bidding by producers and consumers in the wholesale day-ahead market, where an auction system is generally followed. The electricity supply function is discontinuous and increases with the level of demand. The resulting price from the auction, the so-called marginal price, corresponds to the highest price offered by the supply side from those accepted to satisfy demand. The offered prices to sell electricity will, in turn, depend on production costs and these significantly differ among the generation technologies. The generation mix of a specific market area, among other factors, will likely condition the resulting marginal prices and the success of a given market design. Establishing the factors affecting price is crucial for all market participants for obtaining accurate forecasts when planning production and consumption, or when designing hedging strategies to face the price variation risk to which their positions are exposed
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