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The Market Value of Variable Renewables

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  • Lion Hirth

    (Vattenfall Europe AG)

Abstract

The income that wind and solar power receive on the market is affected by the variability of their output. At times of high availability of the primary energy source, they supply electricity at zero marginal costs, shift the supply curve (merit-order curve) to the right and thereby reduce the equilibrium price of electricity during that hour. The size of this merit-order effect depends on the amount of installed renewable capacity, the slope of the merit-order curve, and the intertemporal flexibility of the electricity system. Thus the price of wind power falls with higher penetration rates, even if the average electricity price remains constant. This work quantifies the effect of variability on the market value of renewables using a calibrated model of the European electricity market. The relative price of German wind power (value factor) is estimated to fall from 110% of the average electricity price to 50% as generation increases from zero to 30% of total consumption. For solar power, the drop is even sharper. Hence competitiveness for large-scale renewables deployment will be more difficult to accomplish than often believed.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2012.15.

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Date of creation: Mar 2012
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Handle: RePEc:fem:femwpa:2012.15

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Keywords: Wind Power; Solar Power; Electricity Market; Power Generation Economics; Renewables; Value Factor; Numerical Modelling;

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Citations

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Cited by:
  1. Edenhofer, Ottmar & Hirth, Lion & Knopf, Brigitte & Pahle, Michael & Schlömer, Steffen & Schmid, Eva & Ueckerdt, Falko, 2013. "On the economics of renewable energy sources," Energy Economics, Elsevier, vol. 40(S1), pages S12-S23.
  2. Lion Hirth & Falko Ueckerdt, 2012. "Redistribution Effects of Energy and Climate Policy: The Electricity Market," Working Papers 2012.82, Fondazione Eni Enrico Mattei.
  3. Hirth, Lion & Ueckerdt, Falko, 2013. "Redistribution effects of energy and climate policy: The electricity market," Energy Policy, Elsevier, vol. 62(C), pages 934-947.
  4. Lion Hirth, 2013. "The Optimal Share of Variable Renewables. How the Variability of Wind and Solar Power Affects their Welfare-optimal Deployment," Working Papers 2013.90, Fondazione Eni Enrico Mattei.
  5. Schmid, Eva & Pahle, Michael & Knopf, Brigitte, 2013. "Renewable electricity generation in Germany: A meta-analysis of mitigation scenarios," Energy Policy, Elsevier, vol. 61(C), pages 1151-1163.
  6. Würzburg, Klaas & Labandeira, Xavier & Linares, Pedro, 2013. "Renewable generation and electricity prices: Taking stock and new evidence for Germany and Austria," Energy Economics, Elsevier, vol. 40(S1), pages S159-S171.
  7. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
  8. Wolf-Peter Schill, 2013. "Residual Load, Renewable Surplus Generation and Storage Requirements in Germany," Discussion Papers of DIW Berlin 1316, DIW Berlin, German Institute for Economic Research.
  9. Lion Hirth & Inka Ziegenhagen, 2013. "Control Power and Variable Renewables A Glimpse at German Data," Working Papers 2013.46, Fondazione Eni Enrico Mattei.

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