Setting with the Sun: The Impacts of Renewable Energy on Conventional Generation

Abstract

Policies supporting investment in renewable electricity have been a cornerstone of climate policy in many parts of the world. While previous empirical work explores the economic and environmental impacts of renewable production, the focus has been on the short-run impacts of expanding renewable supply. In this paper, we shed light on the potential longer-run impacts of renewable expansions. Focusing on California’s electricity market, we estimate how wholesale electricity prices have responded to a dramatic increase in utility-scale solar capacity. While an overall decline in daily average prices can be attributed to the solar expansion, this reduction in the average price masks a substantial decrease in midday prices combined with an increase in shoulder hour prices. These results imply that short-term power markets are responding to the renewable expansion in a fashion that could sustain more flexible conventional generation, while undermining the economic viability of traditional baseload generation technologies.