Renewables in Mexico: Non-linear Merit-order Effect and Real Market Value of Wind and Solar in a Warm, Young and Growing Power Market

Abstract

In 2013 an energy reform was approved in Mexico to allow the participation of private firms in the energy sector, where their participation was restricted, creating one of the newest wholesale electricity markets. It has been noted that renewables face a significant and unique problem for their future deployment: as penetration grows, its value to the system decreases. The effect that renewables have to reduce the electricity price came to be known as the “merit-order effect”. That decline in value implies that renewables do not have the same value as other power sources and therefore an assessment of their real market value has become relevant. Using data from January 1st of 2017 to December 31st of 2019, a linear regression model was used to test for empirical and historical evidence of the “merit-order effect” in Mexico. The data shows an economically and statistically significant “merit-order effect” of MXN$0.10/MWh per MWh of renewable generation. At average 1,859MWh of renewables, the average effect is MXN$-183.33/MWh, 13.5% of the average electricity price. Further, there’s evidence that the “merit-order effect” is non-linear and that is different across wind and solar energy. Finally, the market value of renewables was only 93% of the market value of system.