Renewable Energy Integration and Electricity Price Volatility in Nordic Countries: A case study of Wind and Solar Power

Abstract

The research sought to look at how the integration of renewable energy, that is, wind and solar power, affect the volatility of electricity prices in Nordic countries. The study mainly assesses the relationship between wind and solar power integration and volatility of electricity prices and how hourly integration of solar and wind power affects electricity price volatility in Nordic Countries. The study employed a case study approach by purposively selecting the following trading areas: NO2, SE2, DK2, and F1, representing Norway, Sweden, Denmark, and Finland. The study used secondary data from 2018 to 2022 collected from the ENTSO-E database using Python queries and TTF day-ahead benchmark natural Gas prices in Europe from the Montel online database. The data underwent cleaning and preparation to ensure its usability. The volatility of electricity prices was estimated using a 24-hour rolling window as used in financial modeling. To ensure that the data is stationary, an Augmented Dicky-Fuller unit root test and KSPP test were undertaken. The research used the identified ARIMA pattern, best information criterion, and seasonal pattern to develop the SARIMA model. Based on the developed SARIMA model, an EGARCH model was used to estimate the conditional volatility of electricity prices. The conditional volatility of prices was used as the dependent variable for the multivariate OLS estimation.

The result showed that solar power integration had a statistically negative relationship with the volatility of electricity prices in Denmark, while there was no relationship in Sweden. In the case of wind power, it had a significant positive relationship with Denmark and Finland. In contrast, no significant relationship between wind power and the volatility of electricity prices was found for Sweden and Norway.