An Empirical Analysis of the Effect of Wind Power on the Level and the Volatility of the Electricity Price in the Nordic-Baltic Market
Abstract: The recent rise in wind power in Europe may have important consequences for electricity markets. This study analyses the effect of the combined volume of Danish and Swedish wind power on the level and the volatility of the system price in the Nordic-Baltic day-ahead wholesale electricity market. Hourly data between 2014 and 2016 are employed in an ARX-GARCHX framework. Wind power is found to decrease the price level and increase price volatility. The results are robust to various model specifications. Furthermore, the effect of adding wind power is simulated for various levels of demand and existing wind power supply. The impact of wind power on both the level and the volatility of the price is amplified when either demand is relatively high or existing wind power supply is relatively low. Moreover, other variables are also found to affect the price level and volatility. Demand, market coupling and the oil price increase the price level. Hydro power, on the other hand, has an ambiguous impact. A positive effect on price volatility is shown for market coupling and hydro power whereas the oil price decreases the volatility. The impact of demand on price volatility is less clear cut however, as both a positive and negative relationship are found.
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