The effect of intermittent renewables on the electricity price variance

Abstract

The dominating view in the literature is that renewable electricity production increases the price variance on spot markets for electricity. In this paper, we critically review this hypothesis. Using a static market model, we identify the variance of the infeed from intermittent electricity sources (IES) and the shape of the industry supply curve as two pivotal factors influencing the electricity price variance. The model predicts that the overall effect of IES infeed depends on the produced amount: while small to moderate quantities of IES tend to decrease the price variance, large quantities have the opposite effect. In the second part of the paper, we test these predictions using data from Germany, where investments in IES have been massive in the recent years. The results of this econometric analysis largely conform to the predictions from the theoretical model. Our findings suggest that subsidy schemes for IES capacities should be complemented by policy measures supporting variance absorbing technologies such as smart-grids, energy storage, or grid interconnections to ensure the build-up of sufficient capacities in time.