Revisiting the merit-order effect of renewable energy sources

Abstract

An on-going debate in the energy economics and power market community has raised the question if energyonly power markets are increasingly failing due to growing feed-in shares from subsidized renewable energy sources (RES). The short answer to this is: No, they are not failing. Energy-based power markets are, however, facing several market distortions, namely from the gap between the electricity volume traded at day-ahead markets versus the overall electricity consumption as well as the (wrong) regulatory assumption that variable RES generation, i.e., wind and photovoltaic (PV), truly have zero marginal operation costs.