The Nexus between Wholesale Electricity Prices and the Share of Electricity Production from Renewables: An Analysis with and without the Impact of Time of Distress

Abstract

The continuous integration of renewable energy sources into the EU’s energy mix is reshaping the electricity market dynamics mainly due to the merit order mechanism affecting wholesale electricity prices (WHEP). This article aims to review the wholesale electricity market mechanism, identify the key factors affecting WHEP, and assess the extent of their contributions under different circumstances. Time series datasets, consisting of monthly observations of commodity prices and energy data regarding 25 EU members over the time horizons January 2015–December 2020 (pre-crisis) and January 2015–August 2023 (co-crisis), are used to support the theory, perform the comparison, and verify the validity of our hypotheses with the use of correlation and multiple linear regression analyses. Our empirical results show that in both cases, a 1% increase in the share of renewable electricity generation (RES) from one period to the next is ceteris paribus associated with an average of approx. 0.96% decrease in WHEP for the same period. However, extreme natural gas prices during times of distress significantly increase WHEP due to the merit order mechanism, from an average of 0.19% to 0.55%. This novel approach provides deeper insights into the interconnectedness of WHEP and the energy and environmental commodity prices and RES during changing economic and geopolitical circumstances, primarily highlighting the influencing factor of RES in WHEP developments.