Wrangling Renewable Energy Development in the Wild Windy West: A Case Study of Texas

Abstract

The incorporation of zero-marginal cost renewable energy resources has been shown to decrease electricity prices according to the “merit order effect.” However, the literature has yet to reach a consensus on how increasing renewable energy impacts price volatility. This thesis analyzes the impact of renewable energy resources on both the price level and price volatility in Texas’ electricity market. Based on 15-minute electricity price data from 2013 to 2020, wind generation is found to reduce market prices over the entire period, and solar energy is found to reduce prices from 2017-2020. As a relatively new market entrant, solar energy is shown to have a much larger merit order effect in comparison with wind over the latter half of the period of analysis as solar generation is more strongly correlated with the load demand, which has significant positive impact on electricity prices. Thus, solar energy in Texas can play an important role in off-setting peak demand, which typically occurs in the late afternoon. Because solar energy has a stronger impact on peak pricing periods, solar is shown to decrease the daily volatility of prices. Wind energy, on the other hand, is shown to have mixed impacts on price volatility, increasing price volatility when the variability of wind penetration on the grid increases and decreasing price volatility when wind generation is very high. The impact of the merit order effect and the resource adequacy concerns surrounding variable renewable energy integration are especially poignant in energy-only markets like Texas where price alone drives investment incentives. These findings have important implications for policy measures and market remuneration mechanisms designed to facilitate the integration of renewable energy and ensure sufficient incentives are in place to motivate adequate investment in capacity expansion.