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Renewable Energy Technologies and Electricity Forward Market Risks

We analyse how the introduction of the same renewable energy technology at different parts of the electricity supply chain has different price formation effects on wholesale power markets. We develop a multi-stage competitive equilibrium model to evaluate the effects on short-term price formation of a technology shift from conventional to both large-scale renewable energy production (e.g. wind and solar farms) and distributed renewable energy sources (e.g. rooftop solar). We find that wind and solar technologies oppositely affect the forward risk premium, and this is related to technology-varying, risk-related hedging pressures of producers and retailers. We form a multi-factor propositional framework and empirically validate the model by analyzing data from California and Britain; two markets which recently experienced significant increases of renewable power, in terms of utility scale and distributed sources. The work is innovative in showing theoretically and empirically how different types of renewable technologies influence market price formation differently. This has implications for market participants facing wholesale price risks, as well as regulators and policy-makers.

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Keywords: Power markets, Renewable technology, Forward risk premium

DOI: 10.5547/01956574.42.4.dkoo

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Published in Volume 42, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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