The “Merit-order effect” of wind and solar power: Volatility and determinants

Abstract

The investment in renewable energy sources power generation is coming into a stall in face of the removal of incentives in most of the European countries. The technological maturity of wind and solar power generation is the justification basis and market integration of extensive amounts of renewable energy is seen with concern by electricity systems stakeholders. Given the low marginal cost of renewable power generation, the available load in the spot electricity market for conventional and dispatchable power plants is diminishing, the so-called Merit-Order Effect. In this study, we estimate the value of the Merit-Order Effect due to wind and solar power generation in the Iberian electricity market with historical bid supply and demand offers from 2008 to 2017. The estimated values are then used to value determinants and volatility through GARCH econometric modelling. Results demonstrate that the Merit-Order Effect in Iberia is influenced negatively by the residual load and positively by demand, wind power and solar power. Additionally, the high Merit-Order Effect volatility found, mirrors the behavior of spot electricity market.