Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets

Chi-Keung Woo, J. Moore, B. Schneiderman, T. Ho, A. Olson, L. Alagappan, K. Chawla, N. Toyama and Jay Zarnikau ()

Energy Policy, 2016, vol. 92, issue C, 299-312

Abstract: We answer two policy questions: (1) what are the estimated merit-order effects of renewable energy in the California Independent System Operator’s (CAISO’s) day-ahead market (DAM) and real-time market (RTM)? and (2) what causes the hourly DAM and RTM prices to systematically diverge? The first question is timely and relevant because if the merit-order effect estimates are small, California’s renewable energy development is of limited help in cutting electricity consumers’ bills but also has a lesser adverse impact on the state’s investment incentive for natural-gas-fired generation. The second question is related to the efficient market hypothesis under which the hourly RTM and DAM prices tend to converge. Using a sample of about 21,000 hourly observations of CAISO market prices and their fundamental drivers during 12/12/2012–04/30/2015, we document statistically significant estimates (p-value≤0.01) for the DAM and RTM merit-order effects. This finding lends support to California’s adopted procurement process to provide sufficient investment incentives for natural-gas-fired generation. We document that the RTM-DAM price divergence partly depends on the CASIO’s day-ahead forecast errors for system loads and renewable energy. This finding suggests that improving the performance of the CAISO’s day-ahead forecasts can enhance trading efficiency in California’s DAM and RTM electricity markets.

Keywords: Electricity prices; Day-ahead market; Real-time market; Renewable energy; Merit-order effects; California (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (82)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:92:y:2016:i:c:p:299-312

DOI: 10.1016/j.enpol.2016.02.023

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