ChasingtheSunand

CatchingtheWind:

EnergyTransition

andElectricityPrices

inEurope

SerhanCevikandKeitaroNinomiya

WP/22/220

2022

NOV

?2022InternationalMonetaryFund

WP/22/220

IMFWorkingPaper

EuropeanDepartment

ChasingtheSunandCatchingtheWind:EnergyTransitionandElectricityPricesinEuropePreparedbySerhanCevikandKeitaroNinomiya1

AuthorizedfordistributionbyBernardinAkitoby

November2022

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

Abstract

Europeanpowermarketsareinthemidstofunprecedentedchanges,witharecord-breakingsurgeinenergyprices.Thispaperinvestigatestheimpactofgreenpowerresourcesonthelevelandvolatilityofwholesaleelectricitypricesatagranularlevel,usingmonthlyobservationsforapanelof24Europeancountriesovertheperiod2014–2021andalternativeestimationmethodsincludingapanelquantileregressionapproach.WefindthatrenewableenergyisassociatedwithasignificantreductioninwholesaleelectricitypricesinEurope,withanaverageimpactof0.6percentforeach1percentagepointsincreaseinrenewableshare.Wealsofindevidenceforanonlineareffect—thatis,highertheshareofrenewables,thegreateritseffectonelectricityprices.Ontheotherhand,whilequantileestimationresultsaremixedwithregardstotheimpactofrenewablesonthevolatilityofelectricityprices,weobtainevidencethatrenewableenergyhasanegativeeffectonvolatilityatthehighestquantiles.Overall,ouranalysisindicatesthatpolicyreformscanhelpacceleratethegreentransitionwhileminimizingthevolatilityinelectricityprices.

JELClassificationNumbers:

C21;C23;C34;Q41;Q42;Q48

Keywords:

Energytransition;renewables;electiricityprices;panelquantileregression;Europe

Author’sE-MailAddress:

scevik@;

keitaro2@

1TheauthorswouldliketothankChristianBogmans,BorjaGracia,AndreaPescatori,AxelSchimmelpfennig,BaopingShang,AndrewStanley,ZhongxiaZhangandtheparticipantsofaseminarattheEuropeanDepartmentoftheInternationalMonetaryFund(IMF)forhelpfulcommentsandsuggestions,andSadhnaNaikforexcellentresearchassistance.

I.INTRODUCTION

Aplethoraofcyclical,structuralandgeopoliticaldevelopmentshascoalescedintoaperfectstorminEuropewitharecord-breakingsurgeinenergyprices.Russia'sinvasionofUkrainehastriggeredtheworstglobalenergycrisissincetheoilembargoofthe1970s,duringaperiodofstructuralchangesintheenergymatrixascountrieshavebeendiversifyingawayfromfossilfuelsbyincreasingtheshareofrenewableelectricitygenerationinanefforttomitigateclimatechange.2AlthoughthemajorityofelectricityinEuropestillcomesfromfossilfuels—accountingforabout42percentasof2021,theshareofsolarandwindhasalreadyreached16.4percentoftotalelectricitygeneration.Higherpenetrationofrenewableshassignificantbenefitsfordecarbonization,butitisalsoasourceofuncertaintyontheintermittentandvolatileproductionofrenewableassetsthatcouldcausesupply-demandimbalances,instabilityintheelectricitygrid,andmorevolatilepricingbehavior(Figure1).Therefore,aspolicymakersinEuropescrambletorespondtheenergycrisisandshieldconsumersagainsthigherenergyprices,itiscriticaltobetterunderstandhowrenewableenergyaffectselectricityprices.

Europeanpowermarketsareinthemidstofunprecedentedchanges,withatighteningsupply-and-demandbalance.WholesaleelectricitypricesinEuropeincreasedbymorethan400percentfromanaverageof€35permegawatt-hour(MWh)in2020toalmost€250perMWhinDecember2021evenbeforethewarinUkraine,whichpushedtheaveragewholesalepriceofelectricityabove€500perMWhinMarch2022.UnderthemarginalpricingmethodunderlyingwholesaleelectricitypricesinEurope,themostexpensivetechnologyneededtomeetdemandwithinagivenperiodsetsthefinalpriceofelectricityaccordingtothecostofproduction,whichinturndependsonenergysourcesusedinelectricitygeneration.Therefore,inrecentyears,even

Figure1.EnergyTransitionandElectricityPricesinEurope

WholesaleElectricityPrices

(€/MWh)

250

200

150

100

50

0

201620172018201920202021

Source:ENTSO-E;Eurostat;authors’calculations.

ShareofRenewableElectricityGeneration

(Percent)

25

2014201520162017

2018201920202021

20

15

10

0

5

2Energyproductionisresponsiblefornearlythree-quartersofglobalgreenhousegasemissions,withabouthalfoftheseemissionscomingfromelectricitygenerationalone.

4

asthelevelizedcostperunitofelectricityfromnewutility-scalerenewablepowerplantshasdroppedprecipitously,therecentspikeinwholesaleelectricitypricesinEuropehasbroadlybeendrivenbythecostofproductionatnatural-gaspowerplants.

ThisstudycontributestothedebatebyprovidingapaneldataanalysishowthegreentransitionaffectswholesaleelectricitypricesinEurope.Whiletherecentsurgeinoilandnaturalgaspriceshascertainlycontributedtohighercostofelectricitygeneration,thevolatilityofwholesaleelectricitypricesdependsonabroadersetoffactorsincludingavailabilityingeneratingunitsandintermittentoutputofrenewables.Theobjectiveofthisresearchisthereforetwofold:(i)presentstylizedfactsontheenergymatrixandelectricitymarketsacrossEurope;and(ii)exploretheimpactofsolarandwindassetsonthelevelandvolatilityofwholesaleelectricityprices.Thereisextensiveliteratureonenergymarkets,butevidenceontheroleofrenewablesremainsinconclusive.Somefindaprice-dampeningimpactofrenewables(Sensfu?,Ragwitz,andGenoese,2008;Würzburg,Labandeira,andLinares,2013;Cludiusandothers,2014;Ketterer,2014;Clò,Cataldi,andZoppoli,2015;deLagardeandLantz,2019;Maciejowska,2020),butthesestudiesfocusonasinglecountryusingtime-seriesdatatoanalyzethemerit-ordereffectthatdescribesthedeclineinwholesaleelectricitypricesduetoanincreaseinthesupplyofrenewableenergy.Inthiscontext,apaneldataapproachcanprovidemoreaccurateinferencebyaccountingforboththetimeandcross-sectionaldimensionsofelectricitypricesinalargegroupofcountries.Tothisend,weutilizemonthlydataon24Europeanpowermarketsduringtheperiod2014–2021andusealternativeeconometricmethodsincludingapanelquantileregressionwithfixedeffects,whichallowustoprovideagranularanalysisofthelevelandvolatilityofwholesaleelectricitypricesandbettercapturenonlinearityeffectsofthegreentransitiononvariouspricequantilesinEurope.

Theempiricalanalysisshowsthatrenewable-basedenergylowerstheaveragelevelofwholesaleelectricityprices.Asexpected,renewableenergytechnologieswithzeromarginalcostshaveastatisticallysignificantdampeningeffectonwholesaleelectricitypricesinEuropeduringtheperiod2014–2021.Theestimatedcoefficientsontheshareofsolarandwindintotalelectricitygenerationimplythatanincreaseof1percentagepointsinelectricityproducedbyrenewableslowerswholesaleelectricitypricesby0.6percentonaverage.Wealsofindevidenceforanonlineareffect—thatis,highertheshareofrenewables,thegreateritseffectonwholesaleelectricityprices.Furthermore,thequantileregressionapproach—estimatingtheimpactofsolarandwind-basedelectricitygenerationondifferentquantilesofwholesaleelectricityprices—indicatethattheshareofrenewableshasanegativeeffectonthepricelevelbutatdifferentmagnitudesacrossthequantiles,especiallywhenweconductamoregranularanalysisbysplittingtherenewablesintosolarandwind.Allinall,theprice-dampeningeffectofrenewablesiseconomicallysignificantandhighlylikelytobeunderestimatedbecauseoftherelativelylowshareofrenewablesintheenergymatrix—anaverageof14percentduringthesampleperiod.

Weobtainmixedresultswithregardstotheimpactofintermittentrenewablegenerationonthevolatilityofwholesaleelectricityprices.Thestandardanalysisusingtheordinaryleastsquares(OLS)methodshowsthatthereisnostatisticallysignificantrelationshipbetweenrenewable

5

electricitygenerationandthevolatilityofwholesaleelectricityprices,aftercontrollingfortotalelectricityload,crudeoilimportpricesandaveragetemperature.Whilethecoefficientontheshareofrenewablesisnegative,thecoefficientonitsquadratictermisestimatedtohaveapositivesign—anindicationthathighertheshareofrenewables,thegreateritseffectonthevolatilityofwholesaleelectricityprices.Furthermore,thequantileregressionapproachyieldsmixedresultswithregardstotheimpactofrenewablesonthevolatilityofelectricityprices,butthereisstillsomeevidencethatrenewableenergyhasadampeningeffectonpricevolatilityatthehighestquantiles.Nevertheless,theintermittentandvolatilenatureofelectricitygenerationusingrenewableresourcesremainsaconcernasitmaycontributetohigherpricesbecauseofgreaterinstabilityinelectricityprovision.Suchuncertaintyofelectricityproductioncouldleadtohigherelectricitypricestocompensatetheriskpremiumincurredbythedistributioncompanies.

Policyreformscanhelpacceleratethegreentransitionintheenergymatrixwhileminimizingthevolatilityinelectricityprices.Thetransitiontolow-carbonsourcesofpowergenerationisnecessaryformitigatingthesocioeconomicconsequencesofclimatechangeandstrengtheningenergysecurityinEurope(Cevik,2022).Basedonourempiricalfindings,thegreentransitioninthepowersectorcouldalsohelpbringasignificantreductioninelectricityprices.Forexample,increasingtheshareofrenewablesinelectricityproductioninEuropefromanaveragelevelof14percentduringtheperiod2014–2021to30percentwouldlowerwholesaleelectricitypricesby8.8percent—andbyalmost20percentiftheshareofsolarandwindreaches50percent.However,higherpenetrationsofrenewableenergycouldalsoleadgreatervolatilityinelectricityproductionandthushigherwholesaleprices.Therefore,tomaximizethepricedampeningeffectofgreenpowerresources,policymakersneedtopursuereformsformodernizationandcloserintegrationofelectricitygridsthroughoutEuropeandincreaseinvestmenttoreducecongestionontransmissionlinesandintroducevolatility-dampeningtechnologysolutionslikestorage.

Buildingbetterelectricityinterconnectionsisnecessarytoincreasecross-countryelectricitytradewithinEurope.Thiswouldimprovetheefficientallocationofelectricity,especiallyconsideringtheintermittentproductionofrenewablesources.Especiallyinviewofgeostrategicchallenges,Europecanbenefitfromacomprehensivecontinentalelectricitymarketestablishedunderthesupervisionofamultilateralmechanismforcross-countrycoordinationwithamandatetoharmonizeenergypoliciesandlegalregulatoryframeworks,identifystrategicprojectsandsecurenecessaryinvestments.Inthecurrentenvironment,tomitigatethedirectimpactofhighenergypricescausedbyreducedcrudeoilandnaturalgasflowsfromRussia,targetedmeasuressuchasincomesupportarebetterpoliciesthananinterventioninthewholesalemarket.3Lastbutnottheleast,ouranalysisstronglysuggeststhattheintermittentandvolatileproductionofrenewableelectricityrequirescountriestoachieveabetterbalancebetweensolarandwindanddiversifytheenergymatrixwithnonhydrocarbonandnon-weather

3Higherwholesaleelectricitypriceshaveputupwardpressureonretailpricespaidbyhouseholdsandcommercialentities.TheEuropeanUnionhasagreedonapackageofenergyemergencymeasuresamountingto€376billiontocompensateconsumersfortheincreaseinelectricityprices.

6

sensitivetechnologieslikeanewgenerationofgeothermalandnuclearpowerplantstakingamoreprominentroleinprovidingastableandconsistentstreamofelectricityacrossEurope.

Theremainderofthispaperisstructuredasfollows.SectionIIprovidesanoverviewoftherelevantliterature.SectionIIIpresentsthedatausedintheanalysisandstylizedfactsontheenergymatrixandelectricitymarketsinEurope.SectionIVpresentstheempiricalmethodologyandresultsincludingabatteryofrobustnesschecks.Finally,SectionVIoffersconcludingremarkswithpolicyrecommendations.

II.ABRIEFOVERVIEWOFTHELITERATURE

Climatechangehasbecomethedefiningchallengeofthe21stcentury,requiringfar-reachingchangesinthepowersector.Withtheglobalsurfacetemperaturealreadyincreasingbyabout1.1degreesCelsius(°C)comparedwiththepreindustrialaverage,theriskofextremeweatherevents—suchasheatwaves,wildfires,droughts,flooding,andseverestorms—isprojectedtoincreaseoverthenextcentury,astheglobalmeantemperaturecontinuestorisebyasmuchas4°Coverthenextcentury(IPCC2007,2014,2019;2021).Facinganarrowpossibilitytoescapeitsworstenvironmentalandsocioeconomicconsequences,countriesaremovingawayfromfossilfuels—themainsourceofcarbon(CO2)emissions—andinvestinginalternativesourcesofenergywithsmallerCO2footprint.TheincreaseinrenewableenergypenetrationcanleadtoasignificantdeclineinCO2emissions,butitisalsoasourceofuncertaintyontheintermittentproductionofrenewableassetsthatcouldcausesupply-demandimbalances,greaterinstabilityintheelectricitygrid,andmorevolatilepricingbehavior.

Thereisabourgeoningliteratureonenergytransitionawayfromhydrocarbonsanditsimpactonelectricityprices.Investigatingtherelationshipbetweenrenewablesandelectricityprices,somestudiesfindthatanincreaseintheshareofrenewablesourcesintheenergymatrixisfoundtolowerwholesalepricesinanumberofelectricitymarkets(Sensfu?,Ragwitz,andGenoese,2008;Gelabert,Labandeira,andLinares,2011;Würzburg,Labandeira,andLinares,2013;Cludiusandothers,2014;Clò,Cataldi,andZoppoli,2015;GullìandBalbo,2015;Kyritsis,Andersson,andSerletis,2017;deLagardeandLantz,2019;Csereklyei,Qu,andAncev,2019;Prol,Steininger,andZilberman,2020).Thisnegativeimpact,knownasthemerit-ordereffectintheliterature,isattributedtothelowmarginalcostofrenewables,whichshiftstheelectricitysupplycurvetotheright,therebyloweringtheaveragepriceofelectricity.

Anotherstrandofthesestudiesfocusesontherelationshipbetweenrenewableelectricitygenerationandthevolatilityofelectricityprices.Astheshareofrenewableelectricitygenerationhasincreasedovertimeinmanycountries,studieslookatthesharpfluctuationsinpricingbehaviorcausedbytheintermittentnatureofelectricitygenerationthroughsolarandwind.Forexample,GreenandVasilakos(2010),Wooandothers(2011),Ketterer(2014),BallesterandFurió(2015),Clò,Cataldi,andZoppoli(2015),Kyritsis,Andersson,andSerletis(2017),Martinez-Anido,Brinkman,andHodge(2016),andRintam?ki,Siddiqui,andSalo(2017)showthatanincreaseintheelectricitysupplyfromintermittentrenewableassets,suchassolarandwind,increasesthevolatilityofwholesaleelectricityprices,evenifthereisadeclineintheaveragelevel

7

ofprice.Thisismainlybecauseoftheunpredictabilityofrenewablesourcesofenergyandtheinabilitytostoreelectricitygeneratedbyrenewablesduringperiodsoflowdemandwhenonlyafewconventionalpowerplantscanrestrainproduction.

Thispaperbuildsonearlierstudiesbuttakesadifferentmethodologicalapproachtoprovidemorerobustcross-countryestimates.Mostoftheliteraturefocusesontime-seriesanalysisoftherelationshipbetweenrenewableenergyandelectricitypricesinasinglecountry.Apaneldataapproach,ontheotherhand,canimprovetheefficiencyofeconometricestimatesandtherebyprovidemorereliableinferenceofmodelparametersbytakingintoaccountboththetimeandcross-sectionaldimensions,controllingfortheimpactofomittedvariables,anduncoveringdynamicrelationshipsinalargesampleofcountries(Hsiao,Mountain,andHo-Illman,1995).Furthermore,aswholesaleelectricitypricesarecharacterizedbylargefluctuations,spikes,andexcesskurtosis,weuseapanelquantileregressionapproachtopresentagranularinvestigationofthenonlineareffectsofrenewableenergyonwholesaleelectricitypricesathighfrequencyinagroupof24Europeancountriesovertheperiod2014–2021.

III.DATAOVERVIEWANDSTYLIZEDFACTS

Thispaperusesabalancedpaneldatasetofmonthlyobservationscovering24countriesinEuropeduringtheperiod2014–2021.4WholesaleelectricitypricesareobtainedfromtheEuropeanAssociationfortheCooperationofTransmissionSystemOperators(ENTSO-E)in€/MWhonadailybasis,whichweconverttomonthlyaverages.Wemeasurethevolatilityof

wholesaleelectricitypricesasthestandarddeviationcalculatedfromdailyelectricitypricesepdandaveragemonthlypriceepm=∑1epdinthefollowingform:

v(epm)=√(epd?epm)2

Themainvariableofinterestistheshareofelectricitygeneratedbyrenewablesource,includingsolarandwindassets.Wedevelopamoregranularanalysisbyestimatingtheempiricalmodelwiththesharesofsolarandwind.Weincludetotalelectricityloadingigawatt-hour(GWh)5,monthlyaveragecrudeoilimportpriceinUS$perbarrel,andmonthlyaveragetemperatureindegrees°Cascontrolvariables.ThesetofregressorsincludingthemainvariablesofinterestisdrawnfromEurostat.Wetakethelogarithmofthelevelandvolatilityofwholesaleelectricitypricesandallexogenousseries(excepttemperature)toensurestationarityandto

4ThecountriesincludedinoursampleareAustria,Belgium,Bulgaria,Croatia,theCzechRepublic,Denmark,Estonia,Germany,Finland,France,Greece,Hungary,Ireland,Italy,Latvia,Lithuania,theNetherlands,Norway,Poland,Portugal,Romania,Serbia,Slovenia,theSlovakRepublic,Spain,Sweden,SwitzerlandandtheUnitedKingdom.

5Asalternative,weincludetotalelectricitygeneratingcapacity(insteadoftotalelectricityload)andobtainsimilarresults.

8

improvethemodelfit.Thistransformationintonaturallogarithmalsoallowstheinterpretationofcoefficientsaselasticities.

Summarystatisticsforelectricitypricesandrenewableenergy—themainvariableofinterest—showconsiderableheterogeneityacrosscountriesandovertime.AsdisplayedinTable1,themeanvalueofwholesaleelectricitypricesis€58.6perMWhoverthesampleperiod,withastandarddeviationof75.4.Cross-countryvariation,forexample,movesfromaminimumof€1.4perMWhinNorwaytoamaximumof€281perMWhinItaly.Thesamplekurtosisismarkedlyhigherthan3forthelevelandvolatilityofwholesaleelectricityprices,indicatingthatdistributionsexhibitfattails.Positiveskewness,ontheotherhand,impliesagreaterprobabilityoflargeincreasesinpriceandvolatilitythanlargedeclines.Thereisalsosignificantseasonalityinelectricityprices,asshowninFigure2.Seasonalvariations,however,arehighlycorrelated,andthereforeitissufficienttocontrolforseasonalitybyincludingtotalelectricityloadandtemperatureinthemodel.Theaveragevolatilityofwholesaleelectricitypricesasmeasuredbystandarddeviationis21.3,albeitwithsignificantvariationacrosscountrieswithaminimumof0.3andamaximumof1,482.Withregardstothemainvariableofinterest,theshareofrenewablesintotalelectricitygenerationvariesfromaminimumof0percenttoamaximumof78percent,withameanvalueof14percentduringthesampleperiod.WhilethereissignificantvariationamongEuropeancountries,thereisaclearupwardtrendinelectricityproductionusingrenewabletechnologiessincethebeginningofthe1990s,asshowninTable2.Onaverage,renewablesaccountedfor15.1percentoftotalelectricitygenerationin2019,upfrom0.02percentin1990.Thebreakdownofrenewablesalsoshowsasimilarpatternacrosscountriesandovertime,withelectricitygeneratedbysolarandwindincreasingatanacceleratingpace.

Table1.SummaryStatistics

VariableObservationsMeanStd.dev.SkewnessKurtosisMinimumMaximum

Wholesaleelectricityprice

3,459

58.6

75.4

10.2

151.5

1.4

281.0

Volatilityofwholesaleelectricityprice

3,458

21.3

68.8

17.1

337.1

0.3

1,481.9

Renewableenergy

3,459

1,827.6

2,117.7

2.9

15.7

0.0

22,519.0

Solar

2,902

689.6

1,067.3

1.8

4.0

0.0

7,831.0

Wind

3,459

1,142.3

1,427.1

5.1

41.2

0.0

20,681.0

Totalelectricityload

2,796

3,127,295

7,732,635

2.6

6.0

720.6

52,223,569

Crudeoilimportprice

910

54.0

12.8

-0.1

-0.1

13.8

87.4

Temperature

2,332

10.2

7.9

0.1

-0.7

-11.4

26.9

Source:ENTSO-E;Eurostat;authors'calculations.

Table2.ElectricityProductionbyTechnology

(Percentoftotal)

Oil

9.68.01.71.4

Others

0.0

0.0

0.1

0.3

0.1

0.2

0.2

Coal

38.033.630.528.925.725.417.7

Natural

8.610.315.920.322.816.721.0

gas

Waste

0.3

0.4

0.6

0.7

0.9

1.1

1.3

Nuclear

27.3

29.4

28.5

27.5

24.8

23.7

22.6

Hydro

15.7

17.5

17.3

15.0

16.2

16.3

15.9

Biofuels

0.4

0.5

0.7

1.5

2.6

3.9

4.4

Solar

0.0

0.0

0.0

0.0

0.6

2.7

3.8

Wind

0.03.77.811.3

Geothermal

1990

1995

2000

2005

2010

2015

2019

0.1

0.1

0.2

0.2

0.3

0.4

0.5

Source:InternationalEnergyAgency;authors'calculations.

9

Figure2.LandscapeofEuropeanPowerMarkets

ShareofRenewableElectricityGeneration

(Percent)

VolatilityofWholesaleElectricityPrices

(Percent)

100

Range(rhs)

80

Average

70

60

50

40

30

20

10

0

20142015201620162017201820182019202020202021

90

1600

1400

1200

1000

800

600

400

200

0

90

80

70

60

50

40

30

20

10

0

RangeAverage

201620172018201920202021

ShareofSolarPower

(Percent)

ShareofWindPower

(Percent)

80

70

60

50

40

30

20

10

0

RangeAverage

25

20

15

10

5

0

RangeAverage

201620172018201920202021

Temperature

20172018201920202021

CrudeOilImportPrices

(US$perbarrel)

(indegreecelsius)

30

25

20

15

10

5

0

-5

-10

-15

RangeAverage

90

80

70

60

50

40

30

20

10

0

RangeAverage

201420152016201720182019

201420152016201720182019

Source:ENTSO-E;Eurostat;IMF;authors’calculations.

Note:Lightblueareaencompassesminimumandmaximumobservations.

Controlvariablesusedintheanalysispresentcomparablevariationsacrosscountriesandoverthesampleperiod.Themeanvalueoftotalelectricityloadis3.1millionGWhoverthesampleperiod,withaminimumof0.7millionGWhandamaximumof52.2millionGWh.TheaverageimportpriceofcrudeoilisUS$54perbarrel,withaminimumofUS$13.8perbarrelandamaximumofUS$84perbarrel.Finally,thereissignificantvariationinmonthlyaveragetemperaturewithinEurope,varyingfromaminimumof-11.4degrees°Candamaximumof26.9

10

degrees°Cwithameanvalueof10.2degrees°C.Toavoidspuriousestimationresults,itisnecessarytoanalyzethetime-seriespropertiesofthedatabyconductingpanelunitroottests.WecheckthestationarityofallvariablesbyapplyingtheIm-Pesaran-Shin(2003)procedure,whichiswidelyusedintheempiricalliterature.Theresults,availableuponrequest,indicatethatthevariablesarestationaryafterlogarithmictransformation,andwecanproceedwiththeanalysisinlog-levelswithoutfurthermodificationsofthedata.

IV.EMPIRICALMETHODOLOGYANDRESULTS

Weempiricallyinvestigatetheimpactofenergytransitiononelectricitypricesinapanelof24countriesinEuropeovertheperiod2014–2021.Ouranalysisfocusesonhowhigherpenetrationsofrenewableenergyaffectsthelevelandvolatilityofwholesaleelectricityprices.First,weexploretheimpactontheaveragelevelofwholesaleelectricitypricesaccordingtothefollowingempiricalspecificationestimatedinitiallyviatheOLSapproach:

epi,t=aREi,t+FXi,t+7i+ut+ci,t

whereepi,tdenotesthelogarithmofwholesaleelectricitypricesincountryiandtimet;REi,tistheshareofrenewableelectricitygeneration(total,solar—thermalandphotovoltaic—andwind—on-shoreandoff-shore);Xi,tisavectorofcontrolvariablesincludingthelogarithmoftotalelectricityload,monthlyaveragecrudeoilimportprice,andmonthlyaveragetemperature.Second,weestimatetheimpactonthevolatilityofwholesaleelectricitypricesaccordingtothefollowingspecification:

v(epi,t)=aREi,t+FXi,t+7i+ut+ci,t

wherev(epi,t)denotesthelogarithmofthestandarddeviationofwholesaleelectricitypricesincountryiandtimet;REi,tistheshareofrenewables(total,sola