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

Chi Keung WOO, J. MOORE, B. SCHNEIDERMAN, T. HO, A. OLSON, L. ALAGAPPAN, K. CHAWLA, N. TOYAMA, J. ZARNIKAU

Research output: Contribution to journalArticlespeer-review

65 Citations (Scopus)

Abstract

We answer two policy questions: (1) what are the estimated merit-order effects of renewable energy in the California Independent System Operator's (CAISO'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, California's renewable energy development is of limited help in cutting electricity consumers' bills but also has a lesser adverse impact on the state'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 12/12/2012–04/30/2015, we document statistically significant estimates (p-value≤0.01) for the DAM and RTM merit-order effects. This finding lends support to California'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 CASIO's day-ahead forecast errors for system loads and renewable energy. This finding suggests that improving the performance of the CAISO's day-ahead forecasts can enhance trading efficiency in California's DAM and RTM electricity markets. Copyright © 2016 Elsevier Ltd.
Original languageEnglish
Pages (from-to)299-312
JournalEnergy Policy
Volume92
Early online dateMar 2016
DOIs
Publication statusPublished - May 2016

Citation

Woo, C. K., Moore, J., Schneiderman, B., Ho, T., Olson, A., Alagappan, L., et al. (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.

Keywords

  • Electricity prices
  • Day-ahead market
  • Real-time market
  • Renewable energy
  • Merit-order effects
  • California

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