• Environmental and Resource Economics Review
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• v.31 no.2
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• pp.141-163
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• 2022

This paper empirically analyzes the effect of renewable electricity generation on the System Marginal Price (SMP) in Korea. Using an ARX-GARCHX model with hourly data from 2016 to 2020, we evaluate SMP determinants and merit order effects. As a result, we find that solar and wind power, as well as gas price and total load, play a critical role in the SMP. In particular, solar power reduces the SMP level but raises volatility during peak and off-peak periods. This result implies that SMP may fall as renewable electricity generation increases, leading to a decrease in the profitability of existing power plants and investment in renewables. On the other hand, even if the subsidy of renewable energy increases the burden on the SMP, it can be offset by the merit order effect, which lowers the SMP.