Competition in Electricity Markets with Renewable Energy Sources

Abstract

This paper studies the effects of the diversification of energy portfolios on the merit order effect in an oligopolistic energy market. The merit order effect describes the negative impact of renewable energy, typically supplied at the low marginal cost, to the electricity market. We show when thermal generators have a diverse energy portfolio, meaning that they also control some or all of the renewable supplies, they offset the price declines due to the merit order effect because they strategically reduce their conventional energy supplies when renewable supply is high. In particular, when all renewable supply generates profits for only thermal power generators this offset is complete -meaning that the merit order effect is totally neutralized. As a consequence, diversified energy portfolios may be welfare reducing. These results are robust to the presence of forward contracts and incomplete information (with or without correlated types). We further use our full model with incomplete information to study the volatility of energy prices in the presence of intermittent and uncertain renewable supplies.

European Industries’ Energy Efficiency under Different Technological Regimes: The Role of CO2 Emissions, Climate, Path Dependence and Energy Mix

“…Instead, it focuses on other key features of the electricity sector that impact market power, like transmission constraints (Cardell et al, 1997), financial transmission rights (Joskow and Tirole, 2000), and market price caps (Joskow and Tirole, 2007). Acemoglu et al (2017) establish that diverse ownership portfolios of renewable and thermal generation by strategic firms may be welfare reducing, because they can reduce (or even neutralize) the merit order effect. Butner (2018) provides empirical evidence of these effects.…”

Technology Policy and Market Structure: Evidence from the Power Sector

“…Reguant (2019) investi-gates the interaction between carbon taxes, feed-in tariffs, and renewable portfolio standards in California, and shows trade-offs between efficiency and distributional concerns. Dressler (2016), Acemoglu et al (2017), and von der Fehr and Ropenus (2017) analyze the market impact of support mechanisms and costs to consumers theoretically. They propose oligopoly or dominant firm models to analyze pricing decisions when firms hold a portfolio of conventional and subsidized wind and solar capacity.…”

Technology Policy and Market Structure: Evidence from the Power Sector

“…Reguant (2019) investi-gates the interaction between carbon taxes, feed-in tariffs, and renewable portfolio standards in California, and shows trade-offs between efficiency and distributional concerns. Dressler (2016), Acemoglu et al (2017), and von der Fehr and Ropenus (2017) analyze the market impact of support mechanisms and costs to consumers theoretically. They propose oligopoly or dominant firm models to analyze pricing decisions when firms hold a portfolio of conventional and subsidized wind and solar capacity.…”