Renewable integration and electricity spot prices: trends, drivers, and economic implications

Electricity markets serve as the fundamental mechanism for trading electricity, where the supply and demand forces interplay. Historically, driven by their near-zero operating costs, variable renewable energy (VRE) sources have contributed to downward pressure on electricity prices. Many studies have highlighted the significant merit-order effect of VRE sources before 2020. However, since early 2020, European electricity markets have been facing a range of unprecedented factors, including increasing VRE penetration, higher gas prices, and lower demand. While the influence of solar and wind has been widely studied, it is important to understand the influence of conventional generation and demand, especially in the phase of rapid VRE integration and geo-political uncertainties. In this context, the work analyzes the dynamics of electricity prices under varying market conditions, focusing on VRE and fossil gas generation, natural gas prices, and demand across different European bidding zones. A multivariate regression model is developed to quantify the contributions of these influencing factors. Numerical results highlight that the increasing number of negative electricity prices is strongly correlated with solar generation. In the current post-crisis stability period, the impact of VRE on electricity prices is becoming more significant, particularly with natural gas prices falling to pre-crisis levels.