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Renewable energy and electricity prices: indirect empirical evidence from hydro power

Author

Listed:
  • Ronald Huisman

    () (Erasmus School of Economics & IEB)

  • Victoria Stradnic

    () (Erasmus School of Economics)

  • Sjur Westgaard

    () (Norwegian University of Science and Technology)

Abstract

Many countries have introduced policies to stimulate the production of electricity in a sustainable or renewable way. Theoretical and simulation studies provide evidence that the introduction of renewable energy promotion policies lead to lower electricity prices as sustainable energy supply as wind and solar have very low or even zero marginal costs. Empirical support for this result is relatively scarce. The motivation for this study is to provide additional empirical evidence on how the growth of low marginal costs renewable energy supply such as wind and solar influences power prices. We do so indirectly studying Nord Pool market prices where hydro power is the dominant supply source. We argue that the marginal costs of hydro production varies depending on reservoir levels that determine hydro production capacity. Hydro power producers have an option to produce or to delay production and the value of the option to delay increases when the reservoir levels decrease and the option to delay decreases in value when reservoir levels increase and producers face the risk of spillovers. Hence, an increase in reservoir levels mimics the situation of an increase of low marginal costs renewable energy in a market. Our results show that higher reservoir levels, more hydro capacity, lead to significant lower power prices. From this we conclude that an increase in low marginal costs renewable power supply reduces the power prices. The second contribution of this paper is that we develop a market clearing price model by modelling the supply curve of power that varies over time depending on fundamentals such as hydro capacity and the prices of alternative power sources and that deals with maximum prices which apply to all power markets that we know. With our result, we strengthen support for the view that an increase in wind and solar supply lowers the power price. This is good news for consumers, but it increases the costs of sustainable energy policies such as feed-in tariffs and at the same time lowers revenues and profits for power producers in case governments would abandon such policies. This effect makes the economic and policy support for renewable energy less sustainable. Policy makers have to account for this if they want to stimulate a sustainable growth of sustainable energy supply.

Suggested Citation

  • Ronald Huisman & Victoria Stradnic & Sjur Westgaard, 2013. "Renewable energy and electricity prices: indirect empirical evidence from hydro power," Working Papers 2013/24, Institut d'Economia de Barcelona (IEB).
  • Handle: RePEc:ieb:wpaper:2013/6/doc2013-24
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    References listed on IDEAS

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    1. Sáenz de Miera, Gonzalo & del Ri­o González, Pablo & Vizcaino, Ignacio, 2008. "Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain," Energy Policy, Elsevier, vol. 36(9), pages 3345-3359, September.
    2. Hofman, Daan M. & Huisman, Ronald, 2012. "Did the financial crisis lead to changes in private equity investor preferences regarding renewable energy and climate policies?," Energy Policy, Elsevier, vol. 47(C), pages 111-116.
    3. Jónsson, Tryggvi & Pinson, Pierre & Madsen, Henrik, 2010. "On the market impact of wind energy forecasts," Energy Economics, Elsevier, vol. 32(2), pages 313-320, March.
    4. Amundsen, Eirik S. & Mortensen, Jorgen Birk, 2001. "The Danish Green Certificate System: some simple analytical results," Energy Economics, Elsevier, vol. 23(5), pages 489-509, September.
    5. Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models for electricity spot prices," Energy Economics, Elsevier, vol. 32(5), pages 1059-1073, September.
    6. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    7. Sensfuß, Frank & Ragwitz, Mario & Genoese, Massimo, 2008. "The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany," Energy Policy, Elsevier, vol. 36(8), pages 3076-3084, August.
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    Citations

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    Cited by:

    1. Mehtap Kilic & Elisa Trujillo-Baute, 2014. "The stabilizing effect of hydro reservoir levels on intraday power prices under wind forecast errors," Working Papers 2014/30, Institut d'Economia de Barcelona (IEB).
    2. Adom, Philip Kofi & Insaidoo, Michael & Minlah, Michael Kaku & Abdallah, Abdul-Mumuni, 2017. "Does renewable energy concentration increase the variance/uncertainty in electricity prices in Africa?," Renewable Energy, Elsevier, vol. 107(C), pages 81-100.
    3. Dillig, Marius & Jung, Manuel & Karl, Jürgen, 2016. "The impact of renewables on electricity prices in Germany – An estimation based on historic spot prices in the years 2011–2013," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 7-15.
    4. Stein-Erik Fleten & Ronald Huisman & Mehtap Kilic & Enrico Pennings & Sjur Westgaard, 2014. "Electricity futures prices: time varying sensitivity to fundamentals," Working Papers 2014/21, Institut d'Economia de Barcelona (IEB).
    5. Paraschiv, Florentina & Erni, David & Pietsch, Ralf, 2014. "The impact of renewable energies on EEX day-ahead electricity prices," Energy Policy, Elsevier, vol. 73(C), pages 196-210.
    6. Ziel, Florian & Steinert, Rick & Husmann, Sven, 2015. "Efficient modeling and forecasting of electricity spot prices," Energy Economics, Elsevier, vol. 47(C), pages 98-111.
    7. Winkler, Jenny & Gaio, Alberto & Pfluger, Benjamin & Ragwitz, Mario, 2016. "Impact of renewables on electricity markets – Do support schemes matter?," Energy Policy, Elsevier, vol. 93(C), pages 157-167.

    More about this item

    Keywords

    Energy policies; sustainable energy; market clearing price; supply curve model.;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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