The impact of renewable energy forecast errors on imbalance volumes and electricity spot prices

Abstract

This paper contributes to the general consideration of whether a policy of incentivising system operators to improve the quality and market availability of forecasts for renewable energy outputs would be beneficial. Using data from the German electricity market, we investigate the effect of wind and solar energy forecasts errors on imbalance volumes and subsequent spot electricity prices. We use ordinary least squares regression, quantile regression and autoregressive moving averages to identify these relationships using variables that have a quarter-hourly data granularity. The results show that higher wind and solar forecast errors increase the absolute values of imbalance volumes and that these can pass through into higher spot prices. We find that wind forecast errors in Germany impact spot prices more than solar forecasting errors. Policy incentives to improve the accuracy and availability of renewable energy forecasts by the system operators should therefore be encouraged.