Renewable Energy Technologies and Electricity Forward Market Risks

Abstract

We analyse how the introduction of the same renewable energy technology at different parts of the electricity supply chain has different price formation effects on wholesale power markets. We develop a multi-stage competitive equilibrium model to evaluate the effects on short-term price formation of a technology shift from conventional to both large-scale renewable energy production (e.g. wind and solar farms) and distributed renewable energy sources (e.g. rooftop solar). We find that wind and solar technologies oppositely affect the forward risk premium, and this is related to technology-varying, risk-related hedging pressures of producers and retailers. We form a multi-factor propositional framework and empirically validate the model by analyzing data from California and Britain; two markets which recently experienced significant increases of renewable power, in terms of utility scale and distributed sources. The work is innovative in showing theoretically and empirically how different types of renewable technologies influence market price formation differently. This has implications for market participants facing wholesale price risks, as well as regulators and policy-makers.

Short-term risk management of electricity retailers under rising shares of decentralized solar generation

“…The comprehensive investigation above provides interesting insights to evaluate the risk optimization problem faced by the retailer with increasing levels of solar PV self-generation in the residential sector. While a higher volume-risk has been observed in previous research with greater (Russo and Bertsch, 2020;Koolen et al, 2021), results in this study offer a broader understanding of the trading decision and risk optimization problem faced by the retailer in the day-ahead and intraday markets to adjust to this increasing short-term risk.…”

“…With large-scale renewable generation, day-ahead predictions on high levels of renewable energy increase the risk-related hedging pressure of generators. Furthermore, with distributed renewable generation, growing renewable power production raises the hedging needs of retailers (Koolen et al, 2021), particularly when considering rooftop solar PV installations (Russo and Bertsch, 2020). The deployment of rooftop solar PV systems has significantly expanded in recent years, mostly by virtue of supporting policies, such as net metering and fiscal incentives.…”

“…Conejo et al, 2010;Yang et al, 2017). Whereas the potential for risk transfer through derivative products can rise significantly for wind power, hedging solar risk is likely to remain difficult (Hain et al, 2018), mainly for retailers increasingly exposed to the volume risk driven by growing levels of solar PV self-generation on the demand side (Russo and Bertsch, 2020;Koolen et al, 2021). The variability of the electricity demand, its shortterm inelasticity, and the supply rigidity expose retailers to a real-time volume risk, which is more complex to hedge within the day-ahead market, since high differences can emerge between predictions in the day-ahead and intraday market.…”

Impact of COVID-19 on listed European electricity companies: a comparative analysis of investment in renewable and traditional electricity

“…In addition, the expectation theory holds that a risk premium is used to compensate for the uncertainty of the future energy prices caused by the imperfect storability of this energy (Zhang and Farnoosh, 2019). Moreover, Koolen et al (2021) found that renewable energy technology oppositely affects the risk premium due to the heterogenous influence on risk-related hedging pressures of retailers and producers. Krecar and Gubina (2019) stated that, renewable energy increases market risk, influencing the trading and volatility.…”

Decision strategies in sequential power markets with renewable energy

“…Where in markets with moderate intermittent capacity the merit-order effect may prevail, flexible non-intermittent producers may favor spot market conditions through their strategic commitment. Koolen et al (2021) find opposing hedging needs of producers and retailers to affect forward and spot price formation by modelling sequential power markets with an increasing market share of intermittent renewable energy at both sides of the supply chain.…”