Inference of electricity price depletion by wind power in Spain

Wind power is usually given priority in electricity markets by assigning a zero price to its expected output during the settlement process. The more wind power is to be incorporated into the market, the less number of conventional units of output will be required to supply the demand, resulting in an expected drop in electricity prices. Lower electricity prices are good in the long-term for all entities that buy electricity from the market and sell it back to consumers. When the prices drop to minimum levels, however, (a situation called here as price depletion) the profitability of some conventional generators necessary for the supply adequacy of the system in times of low wind power production may get compromised. This work uses a probabilistic model to estimate the role that wind power is playing in the price depletion situations sometimes observed in Spain. Evidence shows that it is a balanced combination of factors what leads to this circumstance.

I. Introduction

THE price formation process in electricity markets follows the fundamental micro economic principle in which market equilibrium is reached when the aggregated supply-side curve, determined by the offered units of output and the corresponding bidding price, intersects the demand curve. The supply curve is always monotonically increasing since output offers are ‘stacked up’ from lower to higher bidding price for each settlement hour. In most jurisdictions, on the other hand, the output from wind farms is given priority over conventional generation and integrated into the market whenever available (unless operational requirements call for curtailments). This is done during the market settlement (usually day-ahead) by assigning a zero bidding price to the forecasted output from the wind farms so that it will always lie at the bottom of the supply stack. Wind power and other generation technologies with dispatch priority are then assumed as ‘price-takers', which means that their output is sold in the market at the clearing price in similar conditions as the rest of the conventional generators.