COVID-19 and the Merit-Order Effect through Wind Energy: The case of Nord Pool Electricity Markets

The COVID-19 pandemic has had profound consequences on global economies, with the electricity sector being no exception. Volatility in electricity prices has become a key concern for policymakers striving to maintain energy security and economic stability. To mitigate the health crisis, governments implemented strict containment measures, including lockdowns, social distancing, and event cancellations. These interventions, while essential for public health, also disrupted energy demand and supply patterns. This study supports regulators by quantifying the short- and long-term impacts of the pandemic on local electricity prices (LEP) in the Nord Pool market (Norway, Sweden, Denmark, Finland, Estonia, Latvia, and Lithuania) during 2020. The findings highlight a crucial link between crisis response strategies and the transition to sustainable energy systems. In times of uncertainty, governments tend to prioritize renewable energy investments, particularly wind power, which offers a clean and resilient alternative to fossil-fuel-based electricity generation. Using the PMG-ARDL estimator, our analysis reveals a significant long-term negative association between government interventions and LEP, as well as between wind energy production (WEP) and LEP. Specifically, an additional gigawatt of wind energy generation reduces local electricity prices by up to €0.09, confirming the merit-order effect in both short- and long-term horizons. These findings emphasize the environmental and economic benefits of expanding wind energy capacity as a stabilizing force in electricity markets. Moreover, while health-related news influenced LEP fluctuations over the long run, government restrictions had a limited short-term impact, likely due to the inelastic nature of electricity demand and supply. This study reinforces the argument that integrating more renewable energy sources can enhance market resilience, reduce price volatility, and contribute to long-term sustainable development, making the energy transition an essential pillar of post-pandemic recovery strategies.