Electricity Prices Under Fire: An Empirical Assessment of Intermittent Renewable Energy Sources as a Remedy to High Gas Prices

Abstract: Europe has experienced a drastic increase in electricity prices since fall 2021, and it is largely acknowledged that this extreme increase is a consequence of the natural gas supply crisis in Europe. Meanwhile, intermittent renewable energy sources (IRES) are playing an ever more important role in the electricity generation of many European countries. This paper assesses whether IRES can contribute to mitigating electricity's dependence on natural gas, despite the reliance on back-up generation technologies. We study the day-ahead electricity spot price in the German market during 2016-2020 using two empirical approaches. By comparing SARIMAX/GARCH models during peak and off-peak hours, we find evidence of a merit-order effect (MOE) of IRES in the German market, amounting to 0.23-0.30 EUR/MWh for a one GWh increase in IRES output. We also confirm that gas price has greater influence on electricity prices during peak hours. Although the MOE is endorsed by our secondary OLS approach, we cannot confirm that IRES significantly reduces the impact of the gas price on electricity prices.