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Competition in Electricity Markets with Renewable Energy Sources

Author

Listed:
  • Daron Acemoglu
  • Ali Kakhbod
  • Asuman Ozdaglar

Abstract

ABSTRACT This paper studies the effects of the diversification of energy portfolios on the merit order effect in an oligopolistic energy market. The merit order effect describes the negative impact of renewable energy, typically supplied at the low marginal cost, to the electricity market. We show when thermal generators have a diverse energy portfolio, meaning that they also control some or all of the renewable supplies, they offset the price declines due to the merit order effect because they strategically reduce their conventional energy supplies when renewable supply is high. In particular, when all renewable supply generates profits for only thermal power generators this offset is complete — meaning that the merit order effect is totally neutralized. As a consequence, diversified energy portfolios may be welfare reducing. These results are robust to the presence of forward contracts and incomplete information (with or without correlated types). We further use our full model with incomplete information to study the volatility of energy prices in the presence of intermittent and uncertain renewable supplies.

Suggested Citation

  • Daron Acemoglu & Ali Kakhbod & Asuman Ozdaglar, 2017. "Competition in Electricity Markets with Renewable Energy Sources," The Energy Journal, , vol. 38(1_suppl), pages 137-156, June.
    • Handle: RePEc:sae:enejou:v:38:y:2017:i:1_suppl:p:137-156
    DOI: 10.5547/01956574.38.SI1.dace
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    Cited by:

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    4. Levitt, Clinton J. & Lovell, Skylar, 2025. "Market share, plant ownership, and the merit-order effect of renewable resources: Evidence from Australia’s National Electricity Market," Utilities Policy, Elsevier, vol. 96(C).
    5. Fikru, Mahelet G. & Belaïd, Fateh & Ma, Hongyan, 2024. "Carbon capture and renewable energy policies: Could policy harmonization be a puzzle piece to solve the electricity crisis?," Energy Economics, Elsevier, vol. 136(C).
    6. Martin Dhaussy & Nandeeta Neerunjun & Hubert Stahn, 2025. "Optimal electricity consumption and storage under short-term renewable supply variability," Working Papers 2026-01, Grenoble Applied Economics Laboratory (GAEL).
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    10. Geert Van Moer, 2024. "Secret Bilateral Forward Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 807-847, June.
    11. Chaiken, Benjamin & Duggan, Joseph E., 2024. "A note on the uniqueness of Nash–Cournot equilibria in an oligopolistic energy market with renewable generation and demand uncertainty," Energy Economics, Elsevier, vol. 138(C).
    12. Abdel Mokhtari & Richard Ruble, 2024. "Strategic investment in electricity generation with renewable entrants: The case of French nuclear power," Working Papers hal-04836469, HAL.
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    15. Joseph Nyangon & Ruth Akintunde, 2024. "Principal component analysis of day‐ahead electricity price forecasting in CAISO and its implications for highly integrated renewable energy markets," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 13(1), January.
    16. Shi, Yong-Heng & Zhao, Tao & Xie, Bai-Chen & Hao, Peng, 2025. "Navigating uncertain generation: The impact of regulation on distributed photovoltaic green electricity trading market participation," Energy Economics, Elsevier, vol. 151(C).
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