Estimating the merit-order effect using coarsened exact matching: Reconciling theory with the empirical results to improve policy implications

Does the merit-order effect vary between renewable technologies? The theory behind the effect predicts the same right shift in the supply curve from solar as from wind electricity, which means no. However, many empirical studies suggest yes. A clear answer to this question is important for policymakers to design suitable policy instruments to promote renewable electricity. This study reconciles the theory of the merit-order effect with the empirical results using a quasi-experimental approach. Coarsened exact matching is applied in order to estimate the merit-order effect for solar and wind electricity generation and the results indicate that when using this thorough identification strategy, there is no empirical evidence for a difference in the merit-order effect between solar and wind electricity generation. To this end, different merit-order effects of solar and wind electricity will originate from interactions with other variable in the electricity system. Therefore, empirical studies need to carefully disentangle the effects of these variables in order to provide useful and reliable insights for policymakers and financial stakeholders.