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Winds of change: How high wind penetrations will affect investment incentives in the GB electricity sector

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  • Steggals, Will
  • Gross, Robert
  • Heptonstall, Philip

Abstract

Wind power is widely expected to expand rapidly in Britain over the next decade. Large amounts of variable wind power on the system will increase market risks, with prices more volatile and load factors for conventional thermal plant lower and more uncertain. This extra market risk may discourage investment in generation capacity. Financial viability for thermal plant will be increasingly dependent on price spikes during periods of low wind. Increased price risk will also make investment in other forms of low-carbon generation (e.g. nuclear power) more challenging. A number of policies can reduce the extent to which generators are exposed to market risks and encourage investment. However, market risks play a fundamental role in shaping efficient investment and dispatch patterns in a liberalised market. Therefore, measures to improve price signals and market functioning (such as a stronger carbon price and developing more responsive demand) are desirable. However, the scale of the investment challenge and increased risk mean targeted measures to reduce (although not eliminate) risk exposure, such as capacity mechanisms and fixed price schemes, may have increasing merit. The challenge for policy is to strike the right balance between market and planned approaches.

Suggested Citation

  • Steggals, Will & Gross, Robert & Heptonstall, Philip, 2011. "Winds of change: How high wind penetrations will affect investment incentives in the GB electricity sector," Energy Policy, Elsevier, vol. 39(3), pages 1389-1396, March.
  • Handle: RePEc:eee:enepol:v:39:y:2011:i:3:p:1389-1396
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    References listed on IDEAS

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    1. Klessmann, Corinna & Nabe, Christian & Burges, Karsten, 2008. "Pros and cons of exposing renewables to electricity market risks--A comparison of the market integration approaches in Germany, Spain, and the UK," Energy Policy, Elsevier, vol. 36(10), pages 3646-3661, October.
    2. Richard J. Green, 2008. "Electricity Wholesale Markets: Designs Now and in a Low-carbon Future," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 95-124.
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    5. Roques Fabien A. & Newbery David M. & Nuttall William J., 2005. "Investment Incentives and Electricity Market Design: the British Experience," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-36, June.
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    8. 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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