Renewable generation, support policies and the merit order effect: A comprehensive overview and the case of wind power in Portugal

Abstract

The growth of wind power generation over the past decade has surpassed all expectations. The cost of the wind energy support policy was, however, quite significant and to a large extent has led to somewhat intensive debates. The merit order effect (MOE) is an important aspect to be considered in all debates, albeit sometimes oversimplified or even ignored. Accordingly, the central goal of this chapter is to analyze and quantify the reduction in the Portuguese day-ahead market prices achieved by wind power as a result of the MOE in the first half of 2016. The results generated by an agent-based simulation tool, called MATREM, indicate a price reduction of about 17 €/MWh for the entire study period. The (total) financial volume of the MOE reached the considerable value of 391.055 million €. Especially noteworthy is the net cost of the wind energy support policy, which takes into account the feed-in tariff, the market value of the wind electricity, and the financial volume of the MOE. This cost reached the value of - 8.248 million € in January 2016, a negative value, indicating that a net profit has occurred in the month. The (total) net cost was 69.011 million € during the study period. Although considerable, this cost should be interpreted carefully, since it did not take into account the interaction of wind generation with the climate policy and the EU emission trading system (i.e., the carbon price effect on the electricity market).