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Market Integration and Wind Generation: An Empirical Analysis of the Impact of Wind Generation on Cross-Border Power Prices

European power markets have become more integrated and renewables have a significant effect on power prices and cross-border exchanges. This paper investigates empirically how the effects of renewables are affected by market expansion across two adjacent countries (France and Germany), based on market data and proprietary data on book orders. We find that wind production lowers power prices on average and increases volatility, not only domestically but also across borders. Using multiple counterfactuals, we examine how our results depend on the level of interconnection and find that further interconnection capacity would decrease price volatility in both countries since the benefits of a larger market would outweigh the contagion effects of volatility. Our findings have important policy implications as they demonstrate the need to coordinate support policies for renewables and policies to support transmission capacity expansion in order to mitigate the impact of volatility on power prices in neighboring power markets.

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Energy Specializations: Electricity – Markets and Prices ; Renewables – Wind ; Renewables – Policy and Regulation; Electricity – Policy and Regulation

JEL Codes: D47: Market Design, Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, D40: Market Structure, Pricing, and Design: General, C51: Model Construction and Estimation, C58: Financial Econometrics

Keywords: electricity market, renewables, market coupling, MGARCH

DOI: 10.5547/01956574.39.3.spha

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Published in Volume 39, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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