The impact of renewables on spillover effects in electricity markets

To address climate change, the EU is rapidly increasing renewable energy in its electricity mix. While supporting decarbonization, this transition raises concerns about market stability, particularly regarding price volatility and price jumps. This study investigates how renewable energy integration impacts volatility spillovers in European electricity markets using the Diebold-Yilmaz spillover index and a dynamic rolling window analysis. The results reveal a sharp decline in volatility spillovers during the COVID-19 pandemic, followed by a peak during the geopolitical tensions surrounding the Ukraine crisis in early 2022. Regionally, France and Germany emerge as net transmitters of risk, whereas Spain, Italy, and Nordic countries primarily act as net receivers. Regression analyses yield robust evidence that increased total load and shares of other renewables, such as biomass, geothermal, and hydro, heighten market connectedness, while wind and solar power have limited effects on overall spillovers. These findings challenge the conventional belief that renewable energy generally increases market volatility. Instead, our results indicate that solar power can mitigate risk transmission across markets, suggesting that increased solar power integration has the potential to reduce volatility spillovers. The study provides critical insights for policymakers seeking to balance renewable energy expansion with electricity market stability.