The Price Impacts of Renewable Power: A Tale of Two Sources

This paper examines how the rapid expansion of wind and solar generation in Spain has reshaped wholesale electricity prices, ancillary service (AS) market costs, and market structure. Using an empirical strategy that exploits exogenous variation in renewable potential, we estimate how market outcomes would have differed under lower renewable capacity (and subsequently, renewable output). We find that rising wind and solar output substantially reduced wholesale prices. However, these reductions are partially offset by increases in AS market procurement and the associated operating costs driven by congestion and other operational challenges of variable generation. We show that while renewable growth reduces concentration in the wholesale market, AS markets remain highly concentrated, with limited scope for competition in key market segments. Our results highlight both the substantial net consumer benefits of renewable expansion on final prices (wholesale plus AS markets), while demonstrating the need for AS market reforms to reduce market concentration and cost-effectively manage increasing levels of renewable generation.