The role of electricity flows and renewable electricity production in the behaviour of electricity prices in Spain

Abstract

Electricity markets are becoming increasingly interconnected, in part, to deal with unpredictability and imbalances in electricity prices. This paper assesses how electricity flows and generation from wind and solar photovoltaic (PV) power impact the volatility and mean of day-ahead electricity prices in Spain. It finds there is a merit order effect from wind and solar PV power at most times of the day, which varies in magnitude for each of the 24 h. Electricity production from wind power is also found to play a clear role in increasing price volatility at all hours. Electricity inflow is shown to decrease both the mean and volatility of the electricity prices. The volatility of electricity prices is revealed to be highly persistent, and thus prone to large transmission shocks. This volatility is also susceptible to new shocks, which may indicate a tendency by market participants to overreact to unexpected shocks in electricity prices, possibly due to the relatively small size of the Iberian electricity market.