Cross-border cannibalization: Spillover effects of wind and solar energy on interconnected European electricity markets

TL;DR

This study empirically analyzes how increased interconnection among European electricity markets influences the market value of wind and solar energy, revealing complex spillover effects that depress domestic renewable values.

Contribution

It quantifies the cross-border effects of renewable expansion on market values, highlighting the contrasting impacts of interconnection on wind and solar energy in Europe.

Findings

Interconnection reduces wind energy value stability.

Neighboring renewables expansion depresses domestic prices.

Wind value is less affected by interconnection than solar.

Abstract

The average revenue, or market value, of wind and solar energy tends to fall with increasing market shares, as is now evident across European electricity markets. At the same time, these markets have become more interconnected. In this paper, we empirically study the multiple cross-border effects on the value of renewable energy: on one hand, interconnection is a flexibility resource that allows to export energy when it is locally abundant, benefitting renewables. On the other hand, wind and solar radiation are correlated across space, so neighboring supply adds to the local one to depress domestic prices. We estimate both effects, using spatial panel regression on electricity market data from 2015 to 2023 from 30 European bidding zones. We find that domestic wind and solar value is not only depressed by domestic, but also by neighboring renewables expansion. The better interconnected a market is, the smaller the effect of domestic but the larger the effect of neighboring renewables. While wind value is stabilized by interconnection, solar value is not. If wind market share increases both at home and in neighboring markets by one percentage point, the value factor of wind energy is reduced by just above 1 percentage points. For solar, this number is almost 4 percentage points.