Renewable energy regulation and structural breaks: An empirical analysis of Spanish electricity price volatility

Abstract

Abstract International experience proves that electricity prices have undergone major changes in volatility since the entry of green technologies. The intermittency of renewable sources is one of the reasons for these changes, as it leads to higher volatility in periods of higher participation by renewables. We argue that the development of the regulatory system promoting renewable electricity also plays a crucial role. We raise a question that deserves attention: could an incentive scheme induce higher share of renewables and lower volatility simultaneously? In this paper, we conduct an empirical analysis with Spanish data. We analyze possible ensuing structural changes in Spanish electricity spot price volatility from January 2002 to December 2017. We identify two structural breaks linked to important measures related to renewable electricity: (i) the abolishment of the feed-in tariff scheme; and (ii) the establishment of a more market-oriented regulation based on investment and operating costs. We conclude that stable regulatory policies reduce volatility even though the presence of renewable sources is greater. Furthermore, market-based policy measures achieve lower volatility, encouraging good integration of intermittent renewable electricity.