Does renewable energy generation decrease the volatility of electricity prices? An analysis of Denmark and Germany

- Renewable energy output may increase or decrease electricity price volatility.
- Data from Denmark and Germany are used to build distributed lag models.
- Explanations for the empirical findings are proposed in order to support policy.

Although variable renewable energy (VRE) technologies with zero marginal costs decrease electricity prices, the literature is inconclusive about how the resulting shift in the supply curves impacts price volatility. Because the flexibility to respond to high peak and low off-peak prices is crucial for demand-response applications and may compensate for the losses of conventional generators caused by lower average prices, there is a need to understand how the penetration of VRE affects volatility. In this paper, we build distributed lag models with Danish and German data to estimate the impact of VRE generation on electricity price volatility. We find that in Denmark wind power decreases the daily volatility of prices by flattening the hourly price profile, but in Germany it increases the volatility because it has a stronger impact on off-peak prices. Our analysis suggests that access to flexible generation capacity and wind power generation patterns contribute to these differing impacts. Meanwhile, solar power decreases price volatility in Germany. By contrast, the weekly volatility of prices increases in both areas due to the intermittency of VRE. Thus, policy measures for facilitating the integration of VRE should be tailored to such region-specific patterns.