Renewables cannibalisation in electricity: modelling the effect on energy pricing

The maturation of renewable energy technologies has brought them to a point of ‘socket parity’, enabling direct competition with traditional energy generation. However, this milestone introduces a critical challenge named price cannibalisation, where excess renewable supply leads to price erosion in energy markets. This research introduces an innovative pricing model that accounts for marginal costs and system price erosion, integrating lognormal and Poisson distributions. The model leverages metrics such as market tightness and capacity utilisation to address complexities of renewables integration. Key innovation is incorporation of zero marginal cost production uncertainties, with important implications for pricing dynamics. Specifically, the model integrates expected production, weighted by Weibull distribution, to capture full spectrum of wind speeds while solar irradiation is weighted by gamma distribution. This novel approach transforms the typically stochastic nature of renewables into a deterministic framework, focusing on average effects of wind and solar rather than modelling full variability. Our findings validate the hypothesis that price cannibalisation influenced more by utilisation than by the level of penetration or tightness. These results present a breakthrough in energy pricing, offering valuable insights for simulation, market design, and energy policy.