Is flexible and dispatchable generation capacity rewarded in electricity futures markets? A multinational impact analysis

Abstract

The profitability of electricity market participants providing flexibility and dispatchability is affected by different determinants. We study how variable renewable energy sources (vRES) and other factors impact both electricity futures prices and hedgeable profit margins of gas generators, proxied by clean spark spreads (CSSs) in futures markets. We focus on futures markets in three European countries (Germany, UK, Nordic) over the time period 2009–2016. We use a statistical univariate ARX TGARCH model that addresses persistency and volatility clustering. We find that the growth in vRES capacity reduces both electricity prices and CSSs more strongly than the changes in the futures fuel and carbon markets. Specifically, an additional 1 GW of installed wind capacity is associated with a decline by 6 cents (1.2%) and 37 cents (0.8%) per MWh in the German CSS and peak load electricity futures, respectively. An additional 1 GW of installed PV capacity is associated with a decline by 4 cents (0.8%) and 28 cents (0.6%) per MWh in the German CSS and peak load electricity futures, respectively. The results suggest that in systems dominated by vRES new markets or instruments may be needed allowing for an adequate risk management for flexible and dispatchable power generators.