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Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets
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 quest...
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Published in: | Energy policy 2016-05, Vol.92, p.299-312 |
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Main Authors: | , , , , , , , , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
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Summary: | 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.
•Estimate the day-ahead and real-time merit-order effects of renewable energy in California.•Document statistically significant merit-order effects of solar and wind energy.•Document the difference between the day-ahead and real-time prices.•Attribute the price differences to forecast errors for load, solar and wind energy.•Discuss the evidence’s implications for California’s energy policy. |
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ISSN: | 0301-4215 1873-6777 |
DOI: | 10.1016/j.enpol.2016.02.023 |