Cross-border cannibalization: Spillover effects of wind and solar energy on interconnected European electricity markets (2405.17166v1)

Abstract: The average revenue, or market value, of wind and solar energy tends to fall with increasing market shares, as is now evident across European electricity markets. At the same time, these markets have become more interconnected. In this paper, we empirically study the multiple cross-border effects on the value of renewable energy: on one hand, interconnection is a flexibility resource that allows to export energy when it is locally abundant, benefitting renewables. On the other hand, wind and solar radiation are correlated across space, so neighboring supply adds to the local one to depress domestic prices. We estimate both effects, using spatial panel regression on electricity market data from 2015 to 2023 from 30 European bidding zones. We find that domestic wind and solar value is not only depressed by domestic, but also by neighboring renewables expansion. The better interconnected a market is, the smaller the effect of domestic but the larger the effect of neighboring renewables. While wind value is stabilized by interconnection, solar value is not. If wind market share increases both at home and in neighboring markets by one percentage point, the value factor of wind energy is reduced by just above 1 percentage points. For solar, this number is almost 4 percentage points.

• The paper reveals that cross-border wind and solar energy penetration lowers market values by over 1 percentage point for wind and nearly 4 for solar.
• It employs rigorous econometric panel models analyzing 30 European bidding zones from 2015 to 2023 to capture spatial spillovers.
• The study suggests targeted policy strategies that balance market interconnectivity with measures to mitigate renewables' cannibalization effects.

Cross-Border Cannibalization: Wind and Solar Energy Effects in Interconnected European Electricity Markets

The research paper titled “Cross-border cannibalization: Spillover effects of wind and solar energy on interconnected European electricity markets” provides a comprehensive empirical analysis of the influence of renewable energy penetration on market values across interconnected European electricity markets. This paper, orchestrated by Clemens Stiewe and colleagues, employs rigorous econometric panel models to explore the dual impact of cross-border electricity trade and domestic renewable energy expansion, focusing on 30 European bidding zones from 2015 to 2023.

Key Findings

The essence of the paper revolves around the complex interplay between domestic and cross-border renewable energy penetration, primarily wind and solar, and its effect on market values. The authors delineate two primary effects: a positive effect from market interconnectivity, which allows exporting surplus renewable electricity, and a negative spillover from neighboring markets, which can depress domestic market prices due to space-correlated renewable generation.

Quantitatively, the paper uncovers that simultaneous increases in wind penetration in both domestic and neighboring markets result in a reduction of the value factor of wind energy by over 1 percentage point; the effect is exponentially larger for solar energy, witnessing an almost 4 percentage-point reduction. These findings underscore the non-trivial, spatial-dependence effect of renewable energy on electricity markets, with domestic markets suffering cannibalization not only from their own renewable expansions but also from those of their neighbors. The regression results, significant at a conventional level, also attest to the distinction between wind and solar outcomes, which directly influences market stability and value.

Implications

The findings generate important policy and strategic implications for energy market integration within the European Union. While interconnected markets provide flexibility to mitigate the domestic cannibalization effect, they also amplify the depressant effect from neighboring renewable deployment. This twofold cross-border impact necessitates a balanced approach in policy-making, where the benefits of market interconnectivity are harnessed while minimizing adverse spillovers through strategic export-import management.

Practically, the paper suggests the need for differential strategies to handle wind and solar energy integration given their distinct generation and consumption profiles. The theoretical implications extend into the need for nuanced market models that integrate spatial spillover effects and address renewables' cannibalization with respect to intermediary storage solutions and diversified interconnectivity infrastructure.

Future Trajectories

The research opens avenues for advanced modeling of electricity markets that incorporate spatial econometrics and address endogenous adjustments like market-based curtailments. Future research could extend the spatial dimension by integrating more granular data on flexible storage deployment and examining its mitigating effects across various renewable energies in interconnected networks.

Overall, by affirming and quantifying the spatial aspects of renewables' market value cannibalization, this paper contributes to a deeper understanding of renewable energy economics in the context of increasingly integrated electricity markets. Further research in these avenues can better equip policymakers and market participants in achieving a sustainable and balanced energy transition.