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The Incentive to Invest in Thermal Plants in the Presence of Wind Generation

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  • di Cosmo, Valeria
  • Malaguzzi Valeri, Laura

Abstract

In a deregulated market, the decision to build new thermal power plants rests with private investors and they will decide whether to invest on the basis of expected profits. This paper evaluates how such profits are affected by the increasing presence of wind generation. We use hourly historical data for the Irish Single Electricity Market, a compulsory pool market with capacity payments, and simulate future series of electricity shadow prices, bids of representative plants and wind generation. We estimate the correlation between shadow price and installed wind capacity on the basis of past data, finding a negative correlation. We then evaluate the effects of increased wind capacity on thermal power plants' expected profits. We find that increasing installed wind from the current level of 2000MW to about 3000MW causes a larger decrease in profits for baseload gas plants and a smaller decrease for less flexible coal-fuelled plants. The decrease in profits is of the order of 1 to 2 per cent.

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Bibliographic Info

Paper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP446.

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Date of creation: Dec 2012
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Handle: RePEc:esr:wpaper:wp446

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Keywords: data/electricity/wind generation;

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  1. Christopher F. Baum & Richard Sperling, 2001. "Tests for stationarity of a time series: update," Stata Technical Bulletin, StataCorp LP, vol. 10(58).
  2. Newbery, David, 2010. "Market design for a large share of wind power," Energy Policy, Elsevier, vol. 38(7), pages 3131-3134, July.
  3. Alfredo Garcia & Juan Alzate & Jorge Barrera, 2012. "Regulatory design and incentives for renewable energy," Journal of Regulatory Economics, Springer, vol. 41(3), pages 315-336, June.
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  8. Gorecki, Paul K., 2011. "The Internal EU Electricity Market: Implications for Ireland," Research Series, Economic and Social Research Institute (ESRI), number RS23.
  9. Christopher F. Baum, 2001. "Tests for stationarity of a time series," Stata Technical Bulletin, StataCorp LP, vol. 10(57).
  10. Devitt, Conor & Malaguzzi Valeri, Laura, 2011. "The Effect of REFIT on Irish Electricity Prices," Papers WP374, Economic and Social Research Institute (ESRI).
  11. Traber, Thure & Kemfert, Claudia, 2011. "Gone with the wind? -- Electricity market prices and incentives to invest in thermal power plants under increasing wind energy supply," Energy Economics, Elsevier, vol. 33(2), pages 249-256, March.
  12. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
  13. 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.
  14. Gross, Robert & Blyth, William & Heptonstall, Philip, 2010. "Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs," Energy Economics, Elsevier, vol. 32(4), pages 796-804, July.
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Cited by:
  1. Deane, Paul & FitzGerald, John & Malaguzzi Valeri, Laura & Tuohy, Aidan & Walsh, Darragh, 2013. "Irish and British Historical Electricity Prices and Implications for the Future," Papers WP452, Economic and Social Research Institute (ESRI).

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