European power markets have become more integrated and renewables have a significant effect on power prices and cross-border exchanges. This paper investigates empirically how the effects of renewables are affected by market expansion across two adjacent countries (France and Germany), based on market data and proprietary data on book orders. We find that wind production lowers power prices on average and increases volatility, not only domestically but also across borders. Using multiple counterfactuals, we examine how our results depend on the level of interconnection and find that further interconnection capacity would decrease price volatility in both countries since the benefits of a larger market would outweigh the contagion effects of volatility. Our findings have important policy implications as they demonstrate the need to coordinate support policies for renewables and policies to support transmission capacity expansion in order to mitigate the impact of volatility on power prices in neighboring power markets.
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