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The Economics of Variable Renewable Energy and Electricity Storage

Author

Listed:
  • Javier López Prol

    (Wegener Center for Climate and Global Change, University of Graz, 8010 Graz, Austria)

  • Wolf-Peter Schill

    (German Institute for Economic Research (DIW Berlin), 10117 Berlin, Germany)

Abstract

The transformation of the electricity sector is a central element of the transition to a decarbonized economy. Conventional generators powered by fossil fuels have to be replaced by variable renewable energy (VRE) sources in combination with electricity storage and other options for providing temporal flexibility. We discuss the market dynamics of increasing VRE penetration and its integration in the electricity system. We describe the merit-order effect (the decline of wholesale electricity prices as VRE penetration increases) and the cannibalization effect (the decline of VRE value as its penetration increases). We further review the role of electricity storage and other flexibility options for integrating variable renewables and how storage can contribute to mitigating the two mentioned effects. We also use a stylized open-source model to provide some graphical intuition on these issues. While relatively high shares of VRE are achievable with moderate amounts of electricity storage, the role of long-duration storage increases as the VRE share approaches 100%.

Suggested Citation

  • Javier López Prol & Wolf-Peter Schill, 2021. "The Economics of Variable Renewable Energy and Electricity Storage," Annual Review of Resource Economics, Annual Reviews, vol. 13(1), pages 443-467, October.
    • Handle: RePEc:anr:reseco:v:13:y:2021:p:443-467
    DOI: 10.1146/annurev-resource-101620-081246
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    Citations

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    Cited by:

    1. De Siano, Rita & Sapio, Alessandro, 2022. "Spatial merit order effects of renewables in the Italian power exchange," Energy Economics, Elsevier, vol. 108(C).
    2. Martin Kittel & Wolf-Peter Schill, 2021. "Renewable Energy Targets and Unintended Storage Cycling: Implications for Energy Modeling," Papers 2107.13380, arXiv.org, revised Sep 2021.
    3. López Prol, Javier & Steininger, Karl W. & Williges, Keith & Grossmann, Wolf D. & Grossmann, Iris, 2023. "Potential gains of long-distance trade in electricity," Energy Economics, Elsevier, vol. 124(C).
    4. Liebensteiner, Mario & Naumann, Fabian, 2022. "Can carbon pricing counteract renewable energies’ cannibalization problem?," Energy Economics, Elsevier, vol. 115(C).
    5. Wadim Strielkowski & Lubomír Civín & Elena Tarkhanova & Manuela Tvaronavičienė & Yelena Petrenko, 2021. "Renewable Energy in the Sustainable Development of Electrical Power Sector: A Review," Energies, MDPI, vol. 14(24), pages 1-24, December.
    6. Gils, Hans Christian & Gardian, Hedda & Kittel, Martin & Schill, Wolf-Peter & Zerrahn, Alexander & Murmann, Alexander & Launer, Jann & Fehler, Alexander & Gaumnitz, Felix & van Ouwerkerk, Jonas & Bußa, 2022. "Modeling flexibility in energy systems — comparison of power sector models based on simplified test cases," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
    7. Kirchem, Dana & Schill, Wolf-Peter, 2023. "Power sector effects of green hydrogen production in Germany," Energy Policy, Elsevier, vol. 182(C).
    8. Sirin, Selahattin Murat & Uz, Dilek & Sevindik, Irem, 2022. "How do macroeconomic dynamics affect small and medium-sized enterprises (SMEs) in the power sector in developing economies: Evidence from Turkey," Energy Policy, Elsevier, vol. 168(C).
    9. Liebensteiner, Mario & Haxhimusa, Adhurim & Naumann, Fabian, 2023. "Subsidized renewables’ adverse effect on energy storage and carbon pricing as a potential remedy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 171(C).
    10. Reichenberg, L. & Ekholm, T. & Boomsma, T., 2023. "Revenue and risk of variable renewable electricity investment: The cannibalization effect under high market penetration," Energy, Elsevier, vol. 284(C).

    More about this item

    Keywords

    energy transition; decarbonization; variable renewable energy sources; electricity storage; merit-order effect; cannibalization effect;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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