Renewable Expansion and Strategic Behavior in Restructured Electricity Markets

The expansion of renewable energy is reshaping price formation and strategic behavior in restructured electricity markets. This paper quantifies the impact of wind and solar on wholesale prices, market power, and generator profitability. Using data from Alberta’s electricity market, I construct an hourly cost-based competitive benchmark from unit-level marginal costs and decompose price effects into cost and markup components. I find that renewables lower average wholesale prices, but their effects on prices and market power are heterogeneous throughout the day. Wind reduces prices and markups in most hours, with larger impacts during high-demand periods. Solar, however, exhibits asymmetric effects. It reduces midday prices and markups but increases them during some morning and evening hours, creating new opportunities for strategic behavior. Counterfactual capacity scenarios indicate that renewable expansion shifts value from energy to flexibility. Inframarginal rents for renewables and baseload combined-cycle units fall, while scarcity rents concentrate into fewer hours, favoring fast-ramping units and storage. These findings demonstrate that adding renewable supply does not, by itself, eliminate market power. Robust market design and flexible resources are essential to keep decarbonizing grids competitive and reliable.