The Merit-Order Effect of Load-Shifting: An Estimate for the Spanish Market

Abstract

Renewable producers can offer selling bids with very low marginal cost since they are not obliged to include on any cost related to the use of energy from the wind or sun. Accordingly, when the Market Operator integrates a renewable bid in the merit-order generation curve, all the generators based on conventional technologies, with higher marginal cost due to the cost of fuels, are displaced to the right. The right-shifting of the merit-order generation curve leads to a lower clearing price, a small increment of the traded energy (almost inelastic demand curve), and a reduction of the total cost of the energy traded in the wholesale market. This is the key mechanism of the well-known merit-order effect of renewables. Load-shifting (demand-side management) plans are expected to yield a reduction of the cost of the traded energy for the customers, since the cost-saving due to the energy eschewed at peak hours would be greater than the extra cost due to the increased demand at off-peak hours. This work will show that the main effects of load-shifting on the market are qualitatively similar to that of renewables, which exemplify the existence a “merit-order effect of load-shifting”. To analyse the characteristics of the merit-order effect of load-shifting, a simplified model has been developed, based on the displacement of the generation and demand curves. A set of scenarios has been generated in order to quantify the main effects on the Spanish/Iberian market for 2015.