Wind power feed-in impact on electricity prices in Germany 2009-2013.

• Author: Benhmad, Francois
• Position: Report

1. Introduction

   Renewable energy is a key component of the EU energy strategy. It started with the adoption of the 1997 White paper and has been driven by the need to decarbonise the energy sector and address growing dependency on fossil fuel imports from politically unstable regions outside the EU. To achieve this goal, the European Union has aimed to have at least 21% of its electricity coming from renewable energy sources.

   Various RES supporting schemes are operating in Europe, mainly feed-in tariffs, fixed premiums, green certificate systems. The German Renewable Energy Act, "Erneuerbare-Energien-Gesetz" (EEG), a well known support scheme, has provided a favorable feed-in tariff (FIT) for a variety of renewable energy sources (RES) since the year 2000. It also gives priority to electric power in-feed from RES over power in-feed from conventional power plants, i.e., fossil- and nuclear-fuel thermal and already existing hydro-based power plants. Thus, all renewable sources combined made up 24 per cent of gross electricity production in 2013 and are Germany's second most important source of electricity generation after lignite (BDEW, 2013). Figure 1 summarizes the recent evolution of the electricity mix.

   Carbon-intensive technologies clearly prevail in Germany, even though the system participation of renewables has grown significantly in the last few years (renewable production tripled from 40 TWh per year in 2001 to more than 150 TWh in 2013).

   However, this success has led to many challenges to Germany energy system, thus raising doubts on RES future economic viability.

   In this paper, we address a central question of the research agenda on renewable energy sources by exploring the impact of the RES on electricity prices (the merit order effect). Indeed, one of the central empirical finding in the literature on renewable energy is that an increase in RES generation would put a downward pressure on the spot electricity market price by displacing the conventional power plants with higher marginal cost.

   The goal of this paper is to carry out an empirical analysis to investigate the well-known merit-order effect by using a data sample of daily electricity spot prices in Germany for the 2009-2013 period.

   There are two main contributions of this study to the literature. Firstly, an AR-X- GARCH-X modeling is used with wind generation as an exogenous variable included in the mean and the variance equation. The goal is to assess the joint impact of intermittent renewable electricity generation on the electricity spot price level as well as on spot price volatility in Germany.

   Secondly, in order to take into account the European grid interconnection, we have proxied it by the Germany-France prices differential (spread) and used it as an additional explanatory variable in our AR-X-GARCH-X model. The goal consists on assessing the market coupling on the RES impact on price level and price volatility.

   Our main findings suggest that intermittent wind power generation does not only decrease the spot electricity price in Germany but also increases its price volatility. However, the downward effect of the feed-in of wind-generated electricity on spot prices and the upward effect on price volatility are limited by the possibility of exporting part of the surplus wind power to Germany's neighbours (including France).

   The so-called merit order effect has gained increasing attention in the literature both on a theoretical basis and an empirical one. Indeed, Jensen and Skytte (2002) point out that RES generation enters at the base of the merit order function, thus shifting the supply curve to the right and crowding the most expensive marginal plants out from the market, with a reduction of the wholesale clearing electricity price.

   Several papers have carried out empirical analysis on the impact of RES in electricity markets, finding evidence of the merit-order effect. Indeed, one of the central empirical findings in the literature on renewable energy (RE) is that an increase in intermittent sources generation would put a downward pressure on the spot electricity market price by displacing high fuel-cost marginal generation. RE installations, although they are very capital-intensive, have almost zero marginal generation cost and thus are certainly dispatched to meet demand. More expensive conventional power plants are crowded out, and the electricity price declines.

   It is worth noting that several authors have explored this topic. For Germany, Bode and Groscurth (2006) find that renewable power generation lowers the electricity price. Neubarth et al. (2006) show that the daily average value of the market spot price decreases by 1 [euro]/MWh per additional 1,000 MW wind capacity. Sensfuss et al. (2008) show that in 2006, renewables reduced the average market price by 7.83 [euro]/MWh. Weigt (2008) concludes that the price was on average 10 [euro]/MWh lower. Nicolosi and Fursch (2009) confirm that in the short run, wind power feed-in reduces prices whereas in the long run, wind power affects conventional capacity, which could eventually be substituted. For Denmark, Munksgaard and Morthorst (2008) conclude that if there is little or no wind (1500MW) spot prices can be brought down to around 34 [euro]/MWh (250 DKK/MWh). Jonsson et al. (2010) show that the average spot price is considerably lower at times where wind power production has been predicted to be large. Saenz de Miera et al. (2008) found that wind power generation in Spain would have led to a drop in the wholesale price amounting to 7.08 [euro]/MWh in 2005, 4.75 [euro]/MWh in 2006, and 12.44 [euro]/MWh during the first half of 2007.

   Gelabert el al. (2011) find that an increase of renewable electricity production by 1 GWh reduces the daily average of the Spanish electricity price by 2 [euro]/MWh. Wurzburg et al. (2013) find that additional RES generation by 1 GWh reduces the daily average price by roughly 1 [euro]/MWh in German and Austrian integrated markets. Woo et al. (2011) carry out a empirical analysis for the Texas electricity price market and showed a strong negative effect of wind power generation on Texas balancing electricity prices. Huisman et al. (2013) obtained equivalent results for the Nord Pool market by modeling energy supply and demand. Ketterer (2014) also examined wind power in German electricity markets and found that an additional RES generation by 1GWh led to a reduction of daily spot price by approximatively 1[euro]/MWh.

   The paper is organized as follows. Section 2 provides an overview of the merit order effect. In section 3, we carry out an...