Renewable Energy in Great Britain: An Empirical Study of the Impact on the Wholesale Electricity Price

Anna Ljungqvist

Student thesis: Master thesis


Background: In 2009 the European Union adopted a new directive on renewable energy. To fulfill the directive, Great Britain (GB) is obliged to increase the amount of electricity generated by renewable sources from 9.4 % in 2011 to 30 % in 2020. In order to reach this target GB has implemented a renewable support mechanism based on a tradable green certificate system. After the introduction of the support system GB has experienced a significant growth in investments in renewable technology. Today the largest share of renewable electricity is generated by wind capacity followed by hydro capacity. Methods and analysis: The main question for the thesis to answer is: How does electricity from renewable sources and the renewable support system affect the wholesale electricity price in Great Britain? To answer this question the competition on the British electricity wholesale market has been analyzed. It was found that electricity generators are able to sell electricity above marginal costs, indicating the presence of market power. Secondly, the functioning of the renewable support system has been analyzed and the investigation showed that the renewable certificates price in practice is fixed at the maximum level. Based on the analyses it is found that a Cournot model can capture the strategic behavior of electricity generators. The theoretical model has been adjusted to incorporate specific characteristics of the British electricity market. Two hypotheses were derived from the theoretical model: a) The wholesale price will decrease following an increase in renewable electricity generation. b) As more renewable capacity is available the volatility of the wholesale price will increase. In order to test the hypotheses empirically an econometric model has been developed. Data has been collected from the time period 2009-2012. To make sure that the regression results produced are reliable the data is investigated for stationarity, co-integration and according to the classical linear regression model assumptions. The theoretical model also explains that the introduction of the support system should have resulted in a decrease in the wholesale price. Unfortunately, due to data constraints it has not been tested if the support system has led to a decrease in the wholesale price. Findings and conclusions: Hypothesis “a “could be confirmed as the results from the econometric model confirmed that wind generation decreases the wholesale price. The results from testing hypothesis “b” were not statistically significant. Therefore it is concluded that increased renewable electricity generation has no explanatory power on the wholesale price volatility. The fact that wind generation leads to a decrease in the wholesale price, is following the Cournot model a sign that market power in the industry has decreased. The consequences for the industry from a decreased wholesale price might be decreased investment incentives both for traditional and renewable technologies. On the other hand, since the wholesale price volatility has not increased the industry should not expect to be charged risk premiums on borrowed capital. This is positive in terms of access to capital for investments.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages126