Comparing merit order effects of wind penetration across wholesale electricity markets

Bolarinwa A. Ajanaku and Alan R. Collins

Renewable Energy, 2024, vol. 226, issue C

Abstract: Renewable energy (RE) deployment is growing rapidly in electricity industries worldwide due to climate change and energy security concerns. Increased penetration into wholesale electricity markets poses new challenges for the electric utility industry. Among the topics receiving increased attention is the decrease of the equilibrium electricity price resulting from RE penetration, commonly known as the Merit Order Effect (MOE) in wholesale electricity markets. The pricing mechanism in most wholesale electricity markets is based on marginal cost. Using data from two wholesale electricity market regions (Pennsylvania – New Jersey – Maryland (PJM) and Electric Reliability Council of Texas (ERCOT)) and two different markets (day-ahead market (DAM) and real-time market (RTM)), we examine whether the MOE exists across both the DAM and RTM and how do different market conditions as represented by quantiles of wholesale electricity prices impact the MOE. Quantile regression is used to obtain coefficient estimates that indicate wind penetration demonstrates the MOE on a relatively consistent basis across market conditions in the DAM for both the PJM and ERCOT regions. However, results from the RTM show vastly different results with the PJM region demonstrating the MOE across all quantiles with declining impacts at higher quantiles and in the ERCOT region, the lower quantiles show a positive impact from wind penetration, failing to support the MOE price-dampening hypothesis. One possible interpretation of this unusual result is linked to connections between ancillary services markets in ERCOT and DAM prices, as described and estimated by Zarnikau et al. (2019) [23].

Keywords: Merit-order effect; Real-time electricity markets; Day-ahead electricity markets; Quantile regression (search for similar items in EconPapers)
JEL-codes: C21 Q41 Q42 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:renene:v:226:y:2024:i:c:s0960148124004373

DOI: 10.1016/j.renene.2024.120372

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