Journal of Energy Markets

Risk.net

Measuring the effect of corrective short-term updates for wind energy forecasts on intraday electricity prices

David Schönheit, Lasse Homann, Dominik Möst and Sjur Westgaard

  • Negative effect of wind energy on intraday prices varies by position in merit order.
  • Residual load can approximate merit order and thus affects negative effect of wind.
  • High residual loads lead to greater negative effects due to merit order’s steepness.
  • Low residual loads lead to greater negative effects due to negative prices.

Transitioning toward a decreased reliance on conventional energy sources subjects electricity markets to greater uncertainties due to the weather dependency of renewable energy sources. Wind energy in Germany has experienced a tremendous expansion, especially over the past two decades. This analysis quantifies how updates in predicted wind energy affect intraday electricity prices. It outlines the merit-order theory and derives hypotheses, testing them by means of exploratory and regression analyses. Wind-speed-based wind energy forecasts are computed to obtain forecasts at two points in time, both before the time of delivery. These two forecasts allow us to measure the effect of the short-term updates between them. The analysis finds that wind energy updates negatively affect intraday prices. The magnitude of the effect differs depending on the position within the merit order approximated by the level of residual load. It is largest for high residual loads and can be explained by the merit-order curve’s steeper shape. In situations of low residual load, the price effect and uncertainty are augmented because of negative prices and larger average forecast errors for wind energy. These results imply that varying predicted residual loads necessitate different risk assessments, for which merit-order-based models can help to anticipate and account for the magnitude of price uncertainties due to (updates for) wind energy forecasts.

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