Accommodating renewable energy sources in a small electricity market: An analysis considering the interactions of sources within Portugal and Spain

The Portuguese and the Spanish electricity generation systems are analysed in this paper. The Iberian market has been isolated and has an increasing proportion of renewable sources. The main objective of this study is to understand how electricity generation sources are interacting with electricity wholesale prices. The VAR approach was used because of its high robustness to cope with the endogeneity detected by Granger block Exogeneity tests. To do this, workweek data recorded since the opening of the Iberian market (July 2, 2007) was used. Despite the geographical proximity of the countries and their access to natural resources, the results provide empirical evidence of different modes of interaction in the market. This outcome could be due to the different sizes of the national systems. The Portuguese electricity generating system does not have an extensive structure to share back-up with Spain via conventional sources. Spain's substantial generation structure could be used to provide intermittent back-up generation for Portugal. Considering the similar supply and demand patterns of the Iberian generation systems, their openness to the other markets with different consumption and generation patterns could allow a more rational utilization of the renewables already deployed and, consequently, bring greater efficiency to the Iberian electricity market.