Cannibalization of Renewable Energy in Spain: Market Implications and Mitigation Strategies through CArbon Pricing and Gurarantess of Origin

Abstract: Renewable cannibalization refers to the phenomenon where the increasing penetration of zeromarginal cost renewable energy sources, such as solar and wind power, leads to a decline in their market value. By extension, this threatens to reduce investment incentives in wind and solar. Based on theory of supply and demand, the extent to which cannibalization is experienced should increase as the penetration of wind and solar increases. Since electricity prices, and therefore cannibalization, are set with considerations to domestic system dynamics, regulations and policies, cannibalization research are typically limited to investigate it for a specific country or region. For this thesis, Spain has been chosen for the case study. Coupling an already high penetration of both wind and solar with ambitious goals for wind and solar capacity expansion, Spain constitutes an interesting case study for cannibalization research. The investigation is centered around two factors, the market capturing price (MCP) and the cannibalization factor (CF). The MCP is the generation weighted electricity price and measures absolute cannibalization, while the CF is the ratio between the MCP and the average electricity price, thus constituting a relative cannibalization measurement. These will be calculated using hourly day-ahead wind and solar forecasts, and day-ahead electricity prices. A time series econometric study is then conducted to quantify the cannibalization effect together with potentially influential factor that, in theory, should be the driving factors behind the cannibalization phenomenon. To investigate dynamic affects across these factors, temporal regressions are conducted. In these regressions, data is isolated in different groups based on their characteristics. Furthermore, carbon pricing and granular guarantees of origin (GOs) are investigated and assessed based on their potential for alleviating the effect of cannibalization.  The study finds that both wind and solar cannibalizes their own market values, and that cannibalization occurs across technologies. The results indicate that there is a negative marginal relation between wind and solar infeed, suggesting the presence of both self-cannibalization and cross-cannibalization effects on their respective MCPs. The same can be said for the CF of solar, for which there is a negative marginal effect with the infeed of wind and solar. These statements hold true across all ranges of wind and solar penetration investigated in the temporal regression analysis. Moreover, the negative relations increase as the penetration range increases, indicating that cannibalization effects are stronger at high renewable penetration. For wind power, this is not entirely the case. Although the regression results yielded a low coefficient of determination (R2), indicating weak explanatory power in the regressions, it is possible to interpret whether the marginal effects are positive or negative. The temporal regression results indicate that there is a positive marginal effect between solar infeed and the CF of wind when the penetration of solar is lower than 10%. Thus, considering the ambitious wind and solar capacity targets of Spain, the economic viability of wind and solar could be threatened. Furthermore, the results from the study indicate that although carbon pricing helps increasing the MCP for both wind and solar by adding an increment to the day-ahead price, it reduces the CF. Furthermore, carbon pricing is a limited tool for alleviating cannibalization, considering that it requires. Thus, once the system is fully decarbonized, carbon pricing is rendered obsolete. On the contrary, the implementation of granular (hourly) GOs provide extra revenue in addition to the revenue from sold electricity. Furthermore, its immediate effect is that it increases the revenue while not impacting the price of electricity. Thus, it helps counteracting both absolute and relative cannibalization effects.