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Intermittently renewable energy, optimal capacity mix and prices in a deregulated electricity market

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  • Milstein, Irena
  • Tishler, Asher
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    Abstract

    This paper assesses the effect of intermittently renewable energy on generation capacity mix and market prices. We consider two generating technologies: (1) conventional fossil-fueled technology such as combined cycle gas turbine (CCGT), and (2) sunshine-dependent renewable technology such as photovoltaic cells (PV). In the first stage of the model (game), when only the probability distribution functions of future daily electricity demand and sunshine are known, producers maximize their expected profits by determining the CCGT and PV capacity to be constructed. In the second stage, once daily demand and sunshine conditions become known, each producer selects the daily production by each technology, taking the capacities of both technologies as given, and subject to the availability of the PV capacity, which can be used only if the sun is shining. Using real-world data for Israel, we confirm that the introduction of PV technology amplifies price volatility. A large reduction in PV capacity cost increases PV adoption but may also raise the average price. Thus, when considering the promotion of renewable energy to reduce CO2 emissions, regulators should assess the behavior of the electricity market, particularly with respect to characteristics of renewable technologies and demand and supply uncertainties.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 39 (2011)
    Issue (Month): 7 (July)
    Pages: 3922-3927

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    Handle: RePEc:eee:enepol:v:39:y:2011:i:7:p:3922-3927

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    Web page: http://www.elsevier.com/locate/enpol

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    Keywords: Electricity markets Renewable technologies Endogenous capacity mix;

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    Cited by:
    1. Stefano Cló & Gaetano D’Adamo, 2014. "The Impact of Solar Penetration on Solar and Gas Market Value: an application to the Italian Power Market," Working Papers, Department of Applied Economics II, Universidad de Valencia 1405, Department of Applied Economics II, Universidad de Valencia.
    2. Lilian de Menezes & Melanie A. Houllier, 2013. "Modelling Germany´s Energy Transition and its Potential Effect on European Electricity Spot Markets," EcoMod2013 5395, EcoMod.
    3. Vahl, Fabrício Peter & Rüther, Ricardo & Casarotto Filho, Nelson, 2013. "The influence of distributed generation penetration levels on energy markets," Energy Policy, Elsevier, Elsevier, vol. 62(C), pages 226-235.
    4. Feuerriegel, Stefan & Neumann, Dirk, 2014. "Measuring the financial impact of demand response for electricity retailers," Energy Policy, Elsevier, Elsevier, vol. 65(C), pages 359-368.
    5. Würzburg, Klaas & Labandeira, Xavier & Linares, Pedro, 2013. "Renewable generation and electricity prices: Taking stock and new evidence for Germany and Austria," Energy Economics, Elsevier, Elsevier, vol. 40(S1), pages S159-S171.
    6. Peeter Pikk & Marko Viiding, 2013. "The dangers of marginal cost based electricity pricing," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, Baltic International Centre for Economic Policy Studies, vol. 13(1), pages 49-62, July.

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