The Merit-Order Effect of Energy Efficiency

Abstract

The integration of certain amount of renewable generation in the wholesale market right-shifted the merit-order generation curve, which produces a noticeable reduction of the clearing price while slightly increases the traded energy (almost inelastic demand curve). The downward pressure on the clearing price is mainly due to the fact that the introduction of renewable generation bids with very low (even null) marginal cost, displaces to the right all kinds of conventional technologies (with higher marginal cost), including the technology which would otherwise have set the clearing market price. This right-shifted displacement of the merit-order generation curve leads to a lower wholesale clearing price, a small increment of the traded energy and a reduction of the total cost of the traded energy in the wholesale market. This is the key mechanism and its main effects on the market of the very well-known merit-order effect of the renewables. The promotion of energy-efficiency plans (industry and domestic) by policy-makers is expected to yield a reduction of the demand. As a result of the reduction of demand bids, the merit-order demand curve would experience a left-sifted displacement, which would produce a reduction of both the clearing price and the amount of traded energy. Consequently, the total cost of the traded energy also would diminish. As can be seen, the parallelism of the main effects on the market between the integration of renewable and energy efficiency evidences the existence of what can be called the merit-order effect of energy efficiency. To analyze the characteristics of this merit-order effect of the energy efficiency, a simplified model, based on the linearization of the market around the clearing point, is developed. This simplified model is also used to compare the merit-order effect of energy efficiency and renewables. A set of scenarios with energy efficiency and renewables have been generated in order to quantify the main effects on the Spanish/Iberian market for the year 2014.