The Merit-Order Effect on the Swedish bidding zone with the highest electricity flow in the Elspot market

Abstract

Electricity interconnections have become increasingly common as a means of integrating electricity markets, expediting the exchange of electricity, and thereby creating balanced electricity systems. These interconnections also facilitate the incorporation of intermittent renewable energy sources, ensuring greater energy security and reliability in electricity markets. In this study, an assessment is made of the impact of both electricity produced from wind power, and the cross-border flow of electricity, on the mean and volatility of the day-ahead electricity price. To do this, we studied the Swedish bidding zone with the highest flow of electricity imports and exports between 2016 and 2019 – the SE3 bidding zone (BZ). Using a SARMAX/GARCH approach, every hour of the day was assessed individually, by estimating up to 24 different models from 1 January 2016 to 30 April 2020. The results confirm the Merit-Order Effect from wind power, and that its impact is similar in magnitude throughout the day. Furthermore, the flow of electricity from both import and export appear to increase the day-ahead electricity price. This study also suggests that the volatility of electricity prices is primarily increased by unexpected shocks. This may be related to the high dependence of the SE3 BZ electricity system on electricity imports, which makes the system extremely susceptible to larger transmission of shocks.