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Renewable Energy Technologies and Electricity Forward Market Risks

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  • Derck Koolen, Derek Bunn, and Wolfgang Ketter

Abstract

We analyse how the introduction of the same renewable energy technology at different parts of the electricity supply chain has different price formation effects on wholesale power markets. We develop a multi-stage competitive equilibrium model to evaluate the effects on short-term price formation of a technology shift from conventional to both large-scale renewable energy production (e.g. wind and solar farms) and distributed renewable energy sources (e.g. rooftop solar). We find that wind and solar technologies oppositely affect the forward risk premium, and this is related to technology-varying, risk-related hedging pressures of producers and retailers. We form a multi-factor propositional framework and empirically validate the model by analyzing data from California and Britain; two markets which recently experienced significant increases of renewable power, in terms of utility scale and distributed sources. The work is innovative in showing theoretically and empirically how different types of renewable technologies influence market price formation differently. This has implications for market participants facing wholesale price risks, as well as regulators and policy-makers.

Suggested Citation

  • Derck Koolen, Derek Bunn, and Wolfgang Ketter, 2021. "Renewable Energy Technologies and Electricity Forward Market Risks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    • Handle: RePEc:aen:journl:ej42-4-bunn
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    Cited by:

    1. Huisman, Ronald & Koolen, Derck & Stet, Cristian, 2021. "Pricing forward contracts in power markets with variable renewable energy sources," Renewable Energy, Elsevier, vol. 180(C), pages 1260-1265.
    2. Russo, Marianna & Kraft, Emil & Bertsch, Valentin & Keles, Dogan, 2022. "Short-term risk management of electricity retailers under rising shares of decentralized solar generation," Energy Economics, Elsevier, vol. 109(C).
    3. Koolen, Derck & Huisman, Ronald & Ketter, Wolfgang, 2022. "Decision strategies in sequential power markets with renewable energy," Energy Policy, Elsevier, vol. 167(C).

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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