Empirical Analysis of the Merit-Order Effect and the Missing Money Problem in Power Markets With High RES Shares

An on-going debate in the energy economics and power market community raises the question if energy-only power markets are increasingly failing due to growing feed-in shares from subsidized renewable energy sources (RES); the argument being essentially that the merit-order effect of RES production depresses day-ahead spot market prices, which in turn creates a situation where power plant owners cannot recover investment costs (missing-money problem). We argue in short that energy-only power markets are not failing in principle but are rather facing several market distortions that hinder proper market functioning, namely 1) the gap between the electricity volume actually traded at day-ahead spot markets versus the overall electricity consumption, and 2) the regulatory assumption that variable RES generation, i.e., wind and photovoltaic (PV), truly has zero marginal operation and grid integration costs. In this paper, we show that both effects over-amplify the well-known merit-order effect of RES power feed-in, and indirectly also the missing-money problem beyond a level that is explainable by underlying physical realities. We empirically analyze the impacts of wind and PV power feed-in on the day-ahead market for the EPEX German-Austrian market zone, a region that is already today experiencing significant feed-in tariff (FIT)-subsidized RES power feed-in (ca. 20% FIT share). Our analysis shows that, if necessary regulatory adaptations are taken, i.e., increasing the spot market's share of overall load demand and using the true marginal costs of RES units in the merit-order, energy-based power markets remain functional despite high RES power feed-in.