Renewable Energy Generation and its Effect on Electricity Prices - A case study of Germany

Abstract

The implementation of renewable energy sources should, according to economic theory, reduce electricity prices. The main reason behind this is the merit order effect, which describes the sequence of contributions from different power stations. Production from renewable energy sources, such as wind and solar, have very low operational costs and thus increasing the net-supply pushes the merit order curve to the right, lowering the price. This study investigates how the electricity prices have changed in Germany during the years 1991-2020. The study also investigates the before and after effect of the Renewable Energy Sources Act of 2000. The characteristics of the German electricity market makes it ideal to study. The results from this study indicate a marginal decreasing effect of implementing renewable energy sources. The large amount of wind generation in Germany seems to have met its peak in the marginal cost curve, and from 2016 the growth of more wind generation increases prices. However, the growth in solar generation now drives the electricity prices downwards. The event study obtained similar results as the 2016 regression, which most certainly is due to problems stemming from highly aggregated data. Based on our results and previous studies in the field, we can observe a trend where renewable energies crowd out the more conventional power plants, resulting in a short term decrease in prices. However, in the long run, the results from the loss of traditional production capacity is unknown.