Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets

Article, Refereed Journal
Woo, C.K., Moore, J., Schneiderman, B., Ho, T., Olson, A., Alagappan, L., Chawla, K., Toyama, N., and Zarnikau, J. 2016. Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets. Energy Policy, 92, 299-312. doi:10.1016/j.enpol.2016.02.023

pWe answer two policy questions: (1) what are the estimated merit-order effects of renewable energy in the California Independent System Operatorrsquo;s (CAISOrsquo;s) day-ahead market (DAM) and real-time market (RTM)? and (2) what causes the hourly DAM and RTM prices to systematically diverge? The first question is timely and relevant because if the merit-order effect estimates are small, Californiarsquo;s renewable energy development is of limited help in cutting electricity consumersrsquo; bills but also has a lesser adverse impact on the statersquo;s investment incentive for natural-gas-fired generation. The second question is related to the efficient market hypothesis under which the hourly RTM and DAM prices tend to converge. Using a sample of about 21,000 hourly observations of CAISO market prices and their fundamental drivers during 12/12/2012ndash;04/30/2015, we document statistically significant estimates (emp/em-valuele;0.01) for the DAM and RTM merit-order effects. This finding lends support to Californiarsquo;s adopted procurement process to provide sufficient investment incentives for natural-gas-fired generation. We document that the RTM-DAM price divergence partly depends on the CASIOrsquo;s day-ahead forecast errors for system loads and renewable energy. This finding suggests that improving the performance of the CAISOrsquo;s day-ahead forecasts can enhance trading efficiency in Californiarsquo;s DAM and RTM electricity markets./p

Research Topic
Energy Policy