IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v48y2016i2p133-151.html
   My bibliography  Save this article

The effects of wind generation capacity on electricity prices and generation costs: a Monte Carlo analysis

Author

Listed:
  • Lynch
  • John Curtis

Abstract

We use Monte Carlo analysis to examine the potential of increased renewable generation to provide a hedge against variability in energy prices and costs. Fuel costs, electricity demand and wind generation are allowed to vary and a unit commitment and economic dispatch algorithm is employed to produce cost-minimizing generation schedules under different levels of installed wind capacity. Increased wind capacity reduces the mean and the variance of production costs but only the variance of electricity prices. Wind generators see their market revenues increase while consumer payments and fossil generator profits do not considerably vary as wind capacity increases. Risk aversion is captured by considering the conditional value-at-risk for both consumers and producers. The optimal level of wind generation increases as risk aversion increases due to the potential of wind to act as a hedge against very high electricity prices in high fuel price scenarios.

Suggested Citation

  • Lynch & John Curtis, 2016. "The effects of wind generation capacity on electricity prices and generation costs: a Monte Carlo analysis," Applied Economics, Taylor & Francis Journals, vol. 48(2), pages 133-151, January.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:2:p:133-151
    DOI: 10.1080/00036846.2015.1076145
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00036846.2015.1076145
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036846.2015.1076145?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cludius, Johanna & Hermann, Hauke & Matthes, Felix Chr. & Graichen, Verena, 2014. "The merit order effect of wind and photovoltaic electricity generation in Germany 2008–2016: Estimation and distributional implications," Energy Economics, Elsevier, vol. 44(C), pages 302-313.
    2. Hiroux, C. & Saguan, M., 2010. "Large-scale wind power in European electricity markets: Time for revisiting support schemes and market designs?," Energy Policy, Elsevier, vol. 38(7), pages 3135-3145, July.
    3. Chattopadhyay, Deb, 2014. "Modelling renewable energy impact on the electricity market in India," Renewable and Sustainable Energy Reviews, Elsevier, vol. 31(C), pages 9-22.
    4. Godby, Robert & Torell, Gregory L. & Coupal, Roger, 2014. "Estimating the value of additional wind and transmission capacity in the rocky mountain west," Resource and Energy Economics, Elsevier, vol. 36(1), pages 22-48.
    5. Carapellucci, Roberto & Giordano, Lorena, 2013. "A methodology for the synthetic generation of hourly wind speed time series based on some known aggregate input data," Applied Energy, Elsevier, vol. 101(C), pages 541-550.
    6. Forrest, Sam & MacGill, Iain, 2013. "Assessing the impact of wind generation on wholesale prices and generator dispatch in the Australian National Electricity Market," Energy Policy, Elsevier, vol. 59(C), pages 120-132.
    7. repec:aen:journl:eeep4_1_valeri is not listed on IDEAS
    8. Mari, Carlo, 2014. "Hedging electricity price volatility using nuclear power," Applied Energy, Elsevier, vol. 113(C), pages 615-621.
    9. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    10. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    11. Roques, Fabien & Hiroux, Céline & Saguan, Marcelo, 2010. "Optimal wind power deployment in Europe--A portfolio approach," Energy Policy, Elsevier, vol. 38(7), pages 3245-3256, July.
    12. Paul Deane, John FitzGerald, Laura Malaguzzi Valeri, Aidan Tuohy and Darragh Walsh, 2015. "Irish and British electricity prices: what recent history implies for future prices," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    13. Gelabert, Liliana & Labandeira, Xavier & Linares, Pedro, 2011. "An ex-post analysis of the effect of renewables and cogeneration on Spanish electricity prices," Energy Economics, Elsevier, vol. 33(S1), pages 59-65.
    14. Yau, Sheena & Kwon, Roy H. & Scott Rogers, J. & Wu, Desheng, 2011. "Financial and operational decisions in the electricity sector: Contract portfolio optimization with the conditional value-at-risk criterion," International Journal of Production Economics, Elsevier, vol. 134(1), pages 67-77, November.
    15. Min, Daiki & Chung, Jaewoo, 2013. "Evaluation of the long-term power generation mix: The case study of South Korea's energy policy," Energy Policy, Elsevier, vol. 62(C), pages 1544-1552.
    16. repec:qut:auncer:2012_5 is not listed on IDEAS
    17. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    18. Chaudry, Modassar & Wu, Jianzhong & Jenkins, Nick, 2013. "A sequential Monte Carlo model of the combined GB gas and electricity network," Energy Policy, Elsevier, vol. 62(C), pages 473-483.
    19. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
    20. McInerney, Celine & Bunn, Derek, 2013. "Valuation anomalies for interconnector transmission rights," Energy Policy, Elsevier, vol. 55(C), pages 565-578.
    21. Adriaan Weijde & Benjamin Hobbs, 2011. "Locational-based coupling of electricity markets: benefits from coordinating unit commitment and balancing markets," Journal of Regulatory Economics, Springer, vol. 39(3), pages 223-251, June.
    22. Ciarreta, Aitor & Espinosa, Maria Paz & Pizarro-Irizar, Cristina, 2014. "Is green energy expensive? Empirical evidence from the Spanish electricity market," Energy Policy, Elsevier, vol. 69(C), pages 205-215.
    23. Lynch, Muireann Á. & Shortt, Aonghus & Tol, Richard S.J. & O'Malley, Mark J., 2013. "Risk–return incentives in liberalised electricity markets," Energy Economics, Elsevier, vol. 40(C), pages 598-608.
    24. Tveten, Åsa Grytli & Bolkesjø, Torjus Folsland & Martinsen, Thomas & Hvarnes, Håvard, 2013. "Solar feed-in tariffs and the merit order effect: A study of the German electricity market," Energy Policy, Elsevier, vol. 61(C), pages 761-770.
    25. Richard Green, 2007. "Nodal pricing of electricity: how much does it cost to get it wrong?," Journal of Regulatory Economics, Springer, vol. 31(2), pages 125-149, April.
    26. Christensen, T.M. & Hurn, A.S. & Lindsay, K.A., 2012. "Forecasting spikes in electricity prices," International Journal of Forecasting, Elsevier, vol. 28(2), pages 400-411.
    27. Woo, C.K. & Horowitz, I. & Moore, J. & Pacheco, A., 2011. "The impact of wind generation on the electricity spot-market price level and variance: The Texas experience," Energy Policy, Elsevier, vol. 39(7), pages 3939-3944, July.
    28. Simoglou, Christos K. & Biskas, Pandelis N. & Vagropoulos, Stylianos I. & Bakirtzis, Anastasios G., 2014. "Electricity market models and RES integration: The Greek case," Energy Policy, Elsevier, vol. 67(C), pages 531-542.
    29. Munksgaard, Jesper & Morthorst, Poul Erik, 2008. "Wind power in the Danish liberalised power market--Policy measures, price impact and investor incentives," Energy Policy, Elsevier, vol. 36(10), pages 3940-3947, October.
    30. Awerbuch, Shimon, 2000. "Investing in photovoltaics: risk, accounting and the value of new technology," Energy Policy, Elsevier, vol. 28(14), pages 1023-1035, November.
    31. Lion Hirth, 2013. "The Market Value of Variable Renewables. The Effect of Solar and Wind Power Variability on their Relative Price," RSCAS Working Papers 2013/36, European University Institute.
    32. Pereira, Sérgio & Ferreira, Paula & Vaz, A.I.F., 2014. "Short-term electricity planning with increase wind capacity," Energy, Elsevier, vol. 69(C), pages 12-22.
    33. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    34. Fouquet, Doerte & Johansson, Thomas B., 2008. "European renewable energy policy at crossroads--Focus on electricity support mechanisms," Energy Policy, Elsevier, vol. 36(11), pages 4079-4092, November.
    35. Devine, Mel & Farrell, Niall & Lee, William, 2014. "Managing investor and consumer exposure to electricity market price risks through Feed-in Tariff design," MPRA Paper 59208, University Library of Munich, Germany.
    36. Clancy, J.M. & Gaffney, F. & Deane, J.P. & Curtis, J. & Ó Gallachóir, B.P., 2015. "Fossil fuel and CO2 emissions savings on a high renewable electricity system – A single year case study for Ireland," Energy Policy, Elsevier, vol. 83(C), pages 151-164.
    37. Seán Diffney & John Fitz Gerald & Seán Lyons & Laura Malaguzzi Valeri, 2009. "Investment in electricity infrastructure in a small isolated market: the case of Ireland," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 25(3), pages 469-487, Autumn.
    38. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    39. Milstein, Irena & Tishler, Asher, 2011. "Intermittently renewable energy, optimal capacity mix and prices in a deregulated electricity market," Energy Policy, Elsevier, vol. 39(7), pages 3922-3927, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Koecklin, Manuel Tong & Longoria, Genaro & Fitiwi, Desta Z. & DeCarolis, Joseph F. & Curtis, John, 2021. "Public acceptance of renewable electricity generation and transmission network developments: Insights from Ireland," Energy Policy, Elsevier, vol. 151(C).
    2. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "The impact of the North Atlantic Oscillation on electricity markets: A case study on Ireland," Energy Economics, Elsevier, vol. 58(C), pages 186-198.
    3. Lynch, Muireann A, 2017. "Re-evaluating Irish energy policy in light of brexit," Research Notes RN20170201, Economic and Social Research Institute (ESRI).
    4. McQuinn, Kieran & Foley, Daniel & O'Toole, Conor, 2017. "Quarterly Economic Commentary, Summer 2017," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20172, June.
    5. Seljom, Pernille & Lindberg, Karen Byskov & Tomasgard, Asgeir & Doorman, Gerard & Sartori, Igor, 2017. "The impact of Zero Energy Buildings on the Scandinavian energy system," Energy, Elsevier, vol. 118(C), pages 284-296.
    6. Sirin, Selahattin Murat & Yilmaz, Berna N., 2021. "The impact of variable renewable energy technologies on electricity markets: An analysis of the Turkish balancing market," Energy Policy, Elsevier, vol. 151(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "The impact of the North Atlantic Oscillation on electricity markets: A case study on Ireland," Energy Economics, Elsevier, vol. 58(C), pages 186-198.
    2. Csereklyei, Zsuzsanna & Qu, Songze & Ancev, Tihomir, 2019. "The effect of wind and solar power generation on wholesale electricity prices in Australia," Energy Policy, Elsevier, vol. 131(C), pages 358-369.
    3. Bell, William Paul & Wild, Phillip & Foster, John & Hewson, Michael, 2017. "Revitalising the wind power induced merit order effect to reduce wholesale and retail electricity prices in Australia," Energy Economics, Elsevier, vol. 67(C), pages 224-241.
    4. Sapio, Alessandro, 2019. "Greener, more integrated, and less volatile? A quantile regression analysis of Italian wholesale electricity prices," Energy Policy, Elsevier, vol. 126(C), pages 452-469.
    5. Figueiredo, Nuno Carvalho & Silva, Patrícia Pereira da, 2019. "The “Merit-order effect” of wind and solar power: Volatility and determinants," Renewable and Sustainable Energy Reviews, Elsevier, vol. 102(C), pages 54-62.
    6. Shao, Jing & Chen, Huanhuan & Li, Jinke & Liu, Guy, 2022. "An evaluation of the consumer-funded renewable obligation scheme in the UK for wind power generation," Renewable and Sustainable Energy Reviews, Elsevier, vol. 153(C).
    7. Thao Pham & Killian Lemoine, 2020. "Impacts of subsidized renewable electricity generation on spot market prices in Germany : Evidence from a GARCH model with panel data," Working Papers hal-02568268, HAL.
    8. Mwampashi, Muthe Mathias & Nikitopoulos, Christina Sklibosios & Konstandatos, Otto & Rai, Alan, 2021. "Wind generation and the dynamics of electricity prices in Australia," Energy Economics, Elsevier, vol. 103(C).
    9. Di Cosmo, Valeria & Malaguzzi Valeri, Laura, 2018. "Wind, storage, interconnection and the cost of electricity generation," Energy Economics, Elsevier, vol. 69(C), pages 1-18.
    10. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    11. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "Carbon dioxide (CO2) emissions from electricity: The influence of the North Atlantic Oscillation," Applied Energy, Elsevier, vol. 161(C), pages 487-496.
    12. Clò, Stefano & D'Adamo, Gaetano, 2015. "The dark side of the sun: How solar power production affects the market value of solar and gas sources," Energy Economics, Elsevier, vol. 49(C), pages 523-530.
    13. De Siano, Rita & Sapio, Alessandro, 2022. "Spatial merit order effects of renewables in the Italian power exchange," Energy Economics, Elsevier, vol. 108(C).
    14. Odeh, Rodrigo Pérez & Watts, David, 2019. "Impacts of wind and solar spatial diversification on its market value: A case study of the Chilean electricity market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 111(C), pages 442-461.
    15. Sinsel, Simon R. & Yan, Xuqian & Stephan, Annegret, 2019. "Building resilient renewable power generation portfolios: The impact of diversification on investors’ risk and return," Applied Energy, Elsevier, vol. 254(C).
    16. Gürtler, Marc & Paulsen, Thomas, 2018. "The effect of wind and solar power forecasts on day-ahead and intraday electricity prices in Germany," Energy Economics, Elsevier, vol. 75(C), pages 150-162.
    17. Macedo, Daniela Pereira & Marques, António Cardoso & Damette, Olivier, 2020. "The impact of the integration of renewable energy sources in the electricity price formation: is the Merit-Order Effect occurring in Portugal?," Utilities Policy, Elsevier, vol. 66(C).
    18. David Wozabal & Christoph Graf & David Hirschmann, 2016. "The effect of intermittent renewables on the electricity price variance," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 38(3), pages 687-709, July.
    19. Brian Rivard and Adonis Yatchew, 2016. "Integration of Renewables into the Ontario Electricity System," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    20. López Prol, Javier & Steininger, Karl W. & Zilberman, David, 2020. "The cannibalization effect of wind and solar in the California wholesale electricity market," Energy Economics, Elsevier, vol. 85(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:48:y:2016:i:2:p:133-151. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.