What comes down must go up: Why fluctuating renewable energy does not necessarily increase electricity spot price variance in Europe

Abstract

The increase in the share of wind and solar energy has led to higher variance in electricity production. We summarize why this does not necessarily result in a higher variance in electricity spot prices but—depending on the shape of the supply curve and variance of the renewable production—can lead to lower price variance. Extending the approach of Wozabal et al. (2016), panel model and single country regression results for seven out of nine analyzed European countries confirm a U-shaped relationship between the share of renewable electricity production and price variance. While the minimum price variance for most countries is found to be between a 10% and 40% renewable electricity production share, price variance is higher for lower and higher shares. The availability of export and import capacities, flexible power plants, and hydro (pump) storage is more important for a country's ability to balance price variance than the level and variance of the renewable infeed itself. Several countries (e.g., Denmark) show how these factors can foster successful integration of high shares of renewables. The finding that the price variance decreases before it rises again in many European countries calls for policies to secure investments in flexibility options, such as grid expansion, storage facilities, flexible power plants, and demand-side management, in the period of low price variance when market-based solutions might fail and eventually lead to situations where electricity system stability is at risk.