A structural analysis of the merit-order effect in the Spanish day-ahead power market

Álvaro Ortega
Authors registered in the RePEc Author Service: Alvaro Escribano

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Renewable generation has increased exceptionally its weight in power markets, and its relevance is due to increase with the introduction of recent climate policies in Europe. The merit-order effect ranks first on the direct impacts of renewables on electricity markets. However, in order to analyse its impact, it is important to control for the different forces driving electricity prices. As a result, the analysis through a structural model of demand and supply of electricity is interesting to capture price drivers and therefore measure correctly the merit-order effect. The objective of this paper is tointroduce this framework on the Spanish day-ahead market, using weekly data for the period 2013-2019. The empirical analysis is carried out using structural vector autoregressive models (SVAR) and autoregressive distributed lag models (ARDL) to each equation, with the addition of GARCH models to control for the possible autoregressive volatility behaviour of the residuals. In line with previous literature, we obtain that demand of electricity is elastic to economic growth, price-inelastic and shows a significant level of substitution between electricity and natural gas. The supply function is also price-inelastic, after controlling for capacity factors, inputs prices and external balance, that are shown to be significant. The estimated values of the merit-order effect is aligned with previous literature. We obtain that a 10% increase in the average quantity generated by the special regime technologies (wind, solar and CHP) is associated with a 5 % reduction in electricity prices, around 2.35Euros/MWh of the average price for the analysed period.

Keywords: Supply; of; Electricity; Merit-Order; Renewable; Generation; Capacity; Factor; Day-Ahead; Power; Market; Demand; of; Electricity (search for similar items in EconPapers)
JEL-codes: L13 L51 L52 L94 (search for similar items in EconPapers)
Date: 2021-09-21
New Economics Papers: this item is included in nep-ene, nep-isf, nep-ore and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:33298

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