Electricity prices beyond the merit order: Structural shocks and asymmetric macroeconomic transmission in Denmark

This paper asks whether electricity-price shocks in renewable-intensive systems transmit to inflation and real activity, and whether that transmission depends on the structural origin and direction of the shock. Using a monthly structural VAR over 2000M1-2025M12 for Denmark, the economy with the highest renewable share among IEA members, we decompose electricity-price movements into wind-based supply, natural-gas price, aggregate demand, and electricity-market (residual) shocks, and trace each to core inflation and industrial production. Our analysis reveals two main findings. First, supply-side conditions account for the majority of electricity-price variation, while domestic demand plays a comparatively limited role, suggesting that the system retains sufficient capacity to absorb routine demand fluctuations without generating large price movements. Second, although electricity prices respond symmetrically on impact to wind surpluses and shortfalls, subsequent adjustment is asymmetric, with increases in electricity prices proving more persistent than declines. This asymmetry also extends to economic transmission, with wind shortfalls exerting larger negative economic effects than the potential benefits associated with wind surpluses, primarily operating through the price channel. The asymmetric macroeconomic costs of renewable variability point to the need for clear policy frameworks that can manage short-run risks around the long-run path to green transition.