The introduction of renewable energy sources (RES) changes the shape of an electricity system's supply curve. In a perfectly competitive market, this causes a downward pressure on equilibrium prices (the merit-of-order effect). In the presence of market power however, introducing or transferring RES assets has ambiguous effects, depending on the degree of dilution of the RES capacity in the firms' portfolios. Using a detailed model of an electricity market, we quantify this effect empirically by finding equilibria under different counterfactual scenarios of RES ownership transfers and expansions. When keeping the total amount of RES constant, we find that transfers from the fringe to strategic players yield positive increases in prices. We call this phenomenon the dilution effect. In addition, we find that equilibrium prices increase by higher amounts when the strategic firms' new portfolios are more diluted. Finally, we show that following a net expansion of RES capacity, the merit-of-order effect dominates the dilution effect, thus leading to lower prices than without the expansion. However, the size of the counteracting force from the dilution effect largely depends on the market power of the new capacity's owner.
Published July 2019 , 24 pages