The Merit Order Effect and market power in the Spanish electricity market

This study attempts to assess the Merit Order Effect (MOE) in Spain during the last decade 2011-2021, this is, the impact of renewable energy sources (RES) in electricity prices. Moreover, it analyses the effects of market concentration on prices and the interaction between the MOE and market power. The topic is significantly relevant at the time of writing for a number of reasons, including the expected growth of RES in Spain, the spectacular recent rise in electricity prices and the oligopolistic nature of the Spanish electricity sector. This study finds that there exists a MOE in the Spanish electricity market that reduces the price of electricity by 0.0029€/MWh for an additional solar MWh and by 0.0023€/MWh for an additional wind MWh. Moreover, it is found that market power increases electricity prices substantially. As the crucial result of this study, it is shown that the MOE can be limited and reduced by market concentration. This last point is particularly relevant because it demonstrates that the MOE does not only depend on RES supply itself, but also on the competitiveness of the market. Consequently, policymakers and competition regulators should strive to make the electricity market more competitive if the economic benefits of the energy transition are to be fully realised by the general public.