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Dynamic volatility spillover effects between wind and solar power generations: Implications for hedging strategies and a sustainable power sector

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  • Song, Feng
  • Cui, Jian
  • Yu, Yihua

Abstract

Large-scale wind and solar development is impeded severely by their inherent volatilities. This study applies a novel approach to reduce the renewable investment risks from the production perspective, although there are many related studies from the financial market perspective. Using daily data from the Gansu province of China between 2013 and 2018 based on a VAR-GARCH model, we first find that wind and solar power generation are volatile, negatively correlated, and exhibit strong time varying spillover effects. We then apply three different approaches to calculate the hedge ratios and optimal capacity portfolios of wind and solar in Gansu. The result from the best MVP approach shows that the optimal capacity weights are 28.3% for wind and 71.7% for solar. This study sheds light on designing a joint development strategy to reduce security risks and integration costs during transition toward a low carbon power sector.

Suggested Citation

  • Song, Feng & Cui, Jian & Yu, Yihua, 2022. "Dynamic volatility spillover effects between wind and solar power generations: Implications for hedging strategies and a sustainable power sector," Economic Modelling, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:ecmode:v:116:y:2022:i:c:s0264999322002735
    DOI: 10.1016/j.econmod.2022.106036
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    More about this item

    Keywords

    Renewable energy; VAR-GARCH; Dynamic volatility spillovers; Hedging strategy; Sustainable economy;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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