1

Machiel Mulder and Bert Scholtens

Faculty of Economics and BusinessUniversity of Groningen

Influence of climate factors on the electricity price

an econometric analysis on the Dutch market over 2006-2011

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1. Background – more wind, solar cells, CHP plants– higher temperatures as a result of climate change (?)

2. Method – reduced-form equation of electricity price– economic factors: demand, fuel price, market power– climate factors: wind, day light, river temperature

3. Data on the Dutch wholesale market

4. Results and conclusions

Outline

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Background: more wind and solar cells0

1020

30G

W

2006 2007 2008 2009 2010 2011(first) jaar

Wind_Neth Wind_Ger0

510

1520

25G

W2006 2007 2008 2009 2010 2011

(first) jaar

Sun_Neth Sun_Ger

Installed WIND capacity (GW) Installed SOLAR capacity (GW)

Dutch market is closely linked to the German market (as part of the NWE market)

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Explaining prices = controlling for demand and supply factors

- time patterns in demand- economic factors affecting demand- market power- fuel costs- environmental restrictions on generation - wind- day light

**

**

*

*

*

*

* **

*

*

* *

**

Price

Quantity

5

Log(APX) = β0

+ β1 log(Demand(-1))

+ β2 log(RSI)

+ β3 log(Gas price(-1))

+ β4 River Temperature

+ β5 log(Wind speed – Netherlands)

+ β6 log(Wind speed - Germany)

+ β7 log(Day light)

+ ε

Model

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Spot prices of electricity, gas and coal

Volatility in day-ahead electricity price decreased strongly

010

020

030

040

050

0In

dex

2006 2007 2008 2009 2010 2011 2012days per year

gas coalelectricity

7

Demand

Demand = production by centralised units + import – export

It is included as a lagged variable (- 1) to control for endogeneity

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Competition: measured by the RSI

RSI (per firm) = (capacity of other firms + import capacity ) / demand

For each hour we include the RSI of the marginal firm

.51

1.5

22.

5in

dex

2006 2007 2008 2009 2010 2011hours

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Gas price

Gas price = TTF day-ahead price

It is included as a lagged variable (- 1) to control for endogeneity

010

2030

4050

Eur

o/M

Wh

2006 2007 2008 2009 2010 2011hours

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Temperature of river water

The threshold is 23 degrees: above this temperature plants have to shut down

This is included in the model as “number of degrees above 23”

0.0

5.0

10.0

15.0

20.0

25.0

degr

ees

Cel

cius

2006 2007 2008 2009 2010 2011days

River temperature

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Wind speed and day light

Wind speed is transformed in an indicator for the supply of wind energy on the basis of technical characteristics of wind generators

Day light is expressed in number of minutes per day

05

1015

met

er/s

econ

d

2006 2007 2008 2009 2010days

Wind speed

020

040

060

080

010

00m

inut

es

2006 2007 2008 2009 2010 2011days

Day light

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Data: correlation matrixAPX Demand

(-1)RSI Gas

price(-1)River temp

Wind-NL Wind-GER

Day light

APX 1.00

Demand(-1)

.21 1.00

RSI -.40 -.44 1.00

Gas price(-1)

.69 -.05 .04 1.00

River temp .10 -.04 .03 .03 1.00

Wind-NL -.13 -.002 .06 -.004 -.10 1.00

Wind-GER -.18 -.006 .07 -.03 -.10 .78 1.00

Day light -.18 -.45 .27 -.14 .17 -.13 -.17 1.00

Note: all variables are measures in logs (except River temp)

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Results Explanatory variables

2006 2007 2008 2009 2010 2011

Log(demand(-1)) .54***(.10)

.20*(.11)

.16**(.07)

.26*** (.06)

.26***(.05)

.14***(.03)

Log(RSI) -.60***(.09)

-.64***(.11)

-.17***(.06)

-.24***(.04)

-.26***(.03)

-.14***(.02)

Log(gas price(-1)) .31***(.07)

.33***(.11)

.38***(.12)

.36***(.07)

.38***(.09)

.60***(.07)

River temperature restriction

.04(.04)

. .05(.19)

.05(.05)

.03(.04)

.

Log(Wind-NL) .01(.008)

-.003(.006)

-.02***(.008)

-.005(.007)

-.008*(.004)

-.006(.004)

Log(Wind-GER) -.05***(.01)

-.05***(.008)

-.03***(.008)

-.04***(.009)

-.02***(.005)

-.03***(.005)

Log(Day light) -.61***(.19)

-.13(.21)

.17(.15)

-.06(.12)

-.06(.09)

.06(.07)

Month dummies (1-11)

Day dummies (1-6)

AR(1) .40***(.07)

.62***(.06)

.58***(.07)

.44***(.07)

.50***(.08)

.26***(.07)

AR(2) -.08(.05)

-.21***(.05)

-.06(.05)

-.08(.06)

.01(.06)

.04(.06)

Variance equation

Constant .01***(.002)

.01***(.001)

.01***(.001)

.01***(.001)

.004***(.0005)

.002***(.0003)

Residual(-1)2 .96***(.17)

.86***(.16)

.60***(.16)

.25***(.10)

.40***(.11)

.61***(.14)

Adjusted R2 .75 .82 .76 .83 .83 .76

F stat. ARCH LM .88 .14 .57 .96 .98 .73

Nobservations 356 357 366 364 365 365

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• The electricity price has become more related to the price of gas

• The merit order has become flatter as changes in demand have a lower impact on the price

• The electricity markets seems to have become more competitive as the influence of pivotal players has reduced

• In spite of the increase in wind and solar capacity, the climate factors have less effect on the electricity price

Conclusions