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Residual Demand Modeling and Application to Electricity Pricing

A model for residual demand is proposed, which extends structural electricity price models to account for renewable infeed in the market. Infeed from wind and solar is modeled explicitly and withdrawn from total demand. The methodology separates the impact of weather and capacity. Efficiency is modeled as a stochastic process. Installed capacity is a deterministic function of time. The residual demand model is applied to the German day-ahead market. Price trajectories show typical features seen in market prices in recent years. The model is able to closely reproduce the structure and magnitude of market prices. Using simulations it is found that renewable infeed increases the volatility of forward prices in times of low demand, but can reduce volatility in peak hours. The merit-order effect of increased wind and solar capacity is calculated. It is found that under current capacity levels in the German market wind has a stronger overall effect than solar, but both are even in peak hours. Keywords: Residual demand modeling, Electricity pricing, Renewable infeed, Wind infeed, Solar infeed, Electricity demand, German power market, Merit-order effect, Structural model

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DOI: 10.5547/01956574.35.2.3

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Published in Volume 35, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.