Essays on electricity market strategies to support a sustainable electricity diversification mix

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Essays on electricity market price dynamics: the effects of restructuring the generation mix and energy transition policies

Publication . Macedo, Daniela Pereira; Marques, António Manuel Cardoso

Producing energy from fossil energy sources is the giant behind the climate change. The energy transition is fostering the massive integration of intermittent Renewable Energy Sources (RES-I) to reduce carbon dioxide and other greenhouse gas emissions. The integration of RES-I, such as wind and solar photovoltaic (PV) power, in electricity markets entails great challenges mainly because of (i) intermittent production levels; and (ii) nearly zero marginal production costs. The inherent features of RES-I are being claimed of decreasing the wholesale electricity price, also known as the Merit-Order Effect (MOE). Meanwhile, the volatility of the wholesale electricity prices was also found to be strongly affected by electricity production levels from RES-I. This thesis is focused on analyzing the electricity market price dynamics in European countries and is divided in two parts. The first part consists of four essays, where the MOE and the behaviour of the wholesale electricity price is assessed in detail. The second part is composed by two essays, that discuss the potential consequences of energy transition policies aiming the reduction of the dependency in fossil fuels. The first part assesses, in the first essay, the impact in behaviour of the volatility of the Portuguese wholesale electricity price of the electricity produced from wind and solar PV power, by analysing two different samples. The long-sample covers a period where both wind and solar PV power incurred significant development levels, although the deployment of wind power stands out. Meanwhile, the small sample is focused in analysing the significant deployment of solar PV power. The main findings of this essay suggest that the the behaviour of the volatility of the electricity price, per-si, is less persistent in short-sample. This could be related to the knowledge acquired by market participants regarding the ramp-up phase of wind power, which makes them less susceptible of making short-sighted decisions in the speed-up period of the solar PV power. Furthermore, the electricity produced from wind and solar PV power revealed to increase and decrease the volatility of the wholesale electricity price, respectively. The differing production patterns of wind and solar PV power could be behind the reasoning for their divergent impacts on the volatility of the wholesale electricity price. Therefore, in the second and third essays, the behaviour of the wholesale electricity price is analysed for each hour of the day, by also considering the role of external factors, namely electricity imports and exports. Two different electricity markets, i.e., the Nord Pool and the Iberian, namely by focusing on Sweden and Spain, respectively, were analysed. The results of these two electricity systems, which have different pricing mechanisms (namely, zonal and uniform) and generation mix structures, were critically compared. The results of essay 2 revealed that the magnitude of the MOE was stable in Sweden during the 24 hours of the day. Meanwhile, in Spain, the behaviour of the MOE was found to vary significantly during the day. In fact, the differing behaviours of the MOE are related with the baseload and backup strategies used in each electricity system. The Swedish electricity system, has high production levels from nuclear power – with low production costs - and it belongs to an electricity market with great production levels of hydro power. However, in the Spanish electricity system, natural gas is the major backup energy source, which entails higher production costs. Another revealing finding of these two essays is the impact of the electricity flow in the behaviour of the wholesale electricity price. In Spain, electricity imports and exports reduce both the mean and volatility of the electricity price, in most hours of the day, as evidenced in the third essay. Meanwhile, in Sweden, the electricity flow, with neighbouring countries, appear to augment the volatility of electricity prices, mainly during peak hours of electricity consumption. This could be related with congestion in transmission lines. In fact, both zonal and uniform pricing mechanism reveal inneficiencies. In the fourth essay, where the main advantages and disadvantages of pricing mechanisms – zonal, uniform and nodal - are discussed, the potential inefficiencies in the redispatch mechanism, in the zonal and uniform pricing mechanisms, are warned. Backup strategies seem to have a prominent role in ensuring energy security. However, recent energy policies appear to underestimate the flexibility needs in electricity markets by strongly betting on displacing fossil energy sources. The second part of this thesis analyses, in the fifth essay, the role of the natural gas in the pre- and post-decommission period of coal power plants, in Portugal. The results revealed that the electricity produced from natural gas explains a greater percentage of the variance in electricity price after the decommissioning of coal power plants. In fact, the energy transition seems not to be ready to displace fossil energy sources from the electricity markets. In the last essay of this thesis, the impact of investment in research, development and demonstration (RD&D) in fossil energy sources and RES in retail electricity prices (both industrial and household) is analysed for 10 European countries. Additional investments RD&D in fossil energy sources is likely to decrease retail electricity prices (both industrial and households), while RD&D investments in RES increase household electricity prices. In short, this thesis provides insightful guidelines for designing energy policies considering the sustainable diversification of the electricity generation mix during the energy transition. The role of the electricity flow and resilient backup strategies were identified as potential strategies to ensure the resilience, as well as the reliability of electricity markets.

2024-09-16Doctoral thesis

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