Electricity Prices Beyond the Merit Order: Structural Shocks and Asymmetric Macroeconomic Transmission in Denmark

This paper investigates the structural drivers of electricity prices and their macroeconomic transmission in Denmark, which has the highest share of wind power in total electricity production among IEA countries. Using a monthly Structural Vector Autoregression (SVAR) over 2000M1-2025M11, we decompose electricity price movements into three distinct shocks: renewable supply (wind-based), natural-gas prices, and aggregate demand. We first assess the relative contribution of each structural shock to electricity price movements, after which we examine how these shocks transmit to core inflation and industrial production. The results indicate that supply-side forces - specifically wind-based electricity generation and natural gas prices - dominate electricity price dynamics, while demand shocks play a modest role. We further test for asymmetry in renewable supply shocks, as implied by the convexity of the merit-order supply curve. We find that renewable supply shocks exhibit pronounced asymmetry: adverse shocks (i.e., reductions in wind-based generation) generate more persistent price increases than the price declines associated with positive shocks. This asymmetry extends beyond electricity price dynamics and generates heterogeneous macroeconomic effects: adverse shocks raise core inflation and depress industrial production, whereas positive shocks, despite lowering electricity prices, do not reduce inflation and only weakly affect industrial production. Historical decompositions suggest that our structural shocks on average account for 68 percent of electricity price fluctuations, with natural gas prices emerging as the main driver of the post-COVID surge in both electricity prices and core inflation. We conclude by discussing the policy implications of these findings for Denmark’s ongoing green transition.