IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v59y2013icp676-688.html
   My bibliography  Save this article

The impact of expansion of wind power capacity and pricing methods on the efficiency of deregulated electricity markets

Author

Listed:
  • Rubin, Ofir D.
  • Babcock, Bruce A.

Abstract

The remarkable expansion of global wind power capacity in many countries brings forward several key economic questions regarding the performance of impacted electricity markets. Wind forecast uncertainties and rules that penalize scheduling deviations often discourage wind energy producers from participating in day-ahead electricity markets. Instead, wind energy commonly is priced either in the real-time balancing market or via a Feed-in-tariff (FIT) arrangement. In this paper we extend a recently developed equilibrium modeling approach to examine how the integration of wind energy impacts premiums in day-ahead electricity markets. In particular, we compare premiums as wind power capacity expands for different pricing mechanisms. By considering operational costs related to ramping conventional generators we are able to characterize the efficient level of premium needed to cope with the intermittent nature of wind. We find that the way that wind energy is priced is critical. We show that in the presence of imperfect competition pricing wind energy in the market increases firms' ability to extract oversized day-ahead premiums while in the case of market-independent FIT, market power is reduced as wind power capacity expands.

Suggested Citation

  • Rubin, Ofir D. & Babcock, Bruce A., 2013. "The impact of expansion of wind power capacity and pricing methods on the efficiency of deregulated electricity markets," Energy, Elsevier, vol. 59(C), pages 676-688.
  • Handle: RePEc:eee:energy:v:59:y:2013:i:c:p:676-688
    DOI: 10.1016/j.energy.2013.07.020
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544213006075
    Download Restriction: Full text for ScienceDirect subscribers only

    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. Holttinen, H., 2005. "Optimal electricity market for wind power," Energy Policy, Elsevier, vol. 33(16), pages 2052-2063, November.
    2. Rubin, Ofir David, 2010. "Equilibrium pricing in electricity markets with wind power," ISU General Staff Papers 201001010800002361, Iowa State University, Department of Economics.
    3. Liu, Wen & Lund, Henrik & Mathiesen, Brian Vad, 2011. "Large-scale integration of wind power into the existing Chinese energy system," Energy, Elsevier, vol. 36(8), pages 4753-4760.
    4. William W. Hogan, 1997. "A Market Power Model with Strategic Interaction in Electricity Networks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 107-141.
    5. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
    6. Green, Richard & Vasilakos, Nicholas, 2010. "Market behaviour with large amounts of intermittent generation," Energy Policy, Elsevier, vol. 38(7), pages 3211-3220, July.
    7. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
    8. Saidur, R. & Islam, M.R. & Rahim, N.A. & Solangi, K.H., 2010. "A review on global wind energy policy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(7), pages 1744-1762, September.
    9. 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.
    10. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
    11. Sinden, Graham, 2007. "Characteristics of the UK wind resource: Long-term patterns and relationship to electricity demand," Energy Policy, Elsevier, vol. 35(1), pages 112-127, January.
    12. Vandezande, Leen & Meeus, Leonardo & Belmans, Ronnie & Saguan, Marcelo & Glachant, Jean-Michel, 2010. "Well-functioning balancing markets: A prerequisite for wind power integration," Energy Policy, Elsevier, vol. 38(7), pages 3146-3154, July.
    13. Olsina, Fernando & Roscher, Mark & Larisson, Carlos & Garces, Francisco, 2007. "Short-term optimal wind power generation capacity in liberalized electricity markets," Energy Policy, Elsevier, vol. 35(2), pages 1257-1273, February.
    14. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter.
    15. Nielsen, Steffen & Sorknæs, Peter & Østergaard, Poul Alberg, 2011. "Electricity market auction settings in a future Danish electricity system with a high penetration of renewable energy sources – A comparison of marginal pricing and pay-as-bid," Energy, Elsevier, vol. 36(7), pages 4434-4444.
    16. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    17. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    18. 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.
    19. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    20. Li, Gong & Shi, Jing & Qu, Xiuli, 2011. "Modeling methods for GenCo bidding strategy optimization in the liberalized electricity spot market–A state-of-the-art review," Energy, Elsevier, vol. 36(8), pages 4686-4700.
    21. Rubin, Ofir D. & Babcock, Bruce A., 2011. "A novel approach for modeling deregulated electricity markets," Energy Policy, Elsevier, vol. 39(5), pages 2711-2721, May.
    22. Connolly, D. & Lund, H. & Mathiesen, B.V. & Leahy, M., 2010. "Modelling the existing Irish energy-system to identify future energy costs and the maximum wind penetration feasible," Energy, Elsevier, vol. 35(5), pages 2164-2173.
    23. Pereira, Adelino J.C. & Saraiva, João Tomé, 2013. "Long term impact of wind power generation in the Iberian day-ahead electricity market price," Energy, Elsevier, vol. 55(C), pages 1159-1171.
    24. 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.
    25. Twomey, Paul & Neuhoff, Karsten, 2010. "Wind power and market power in competitive markets," Energy Policy, Elsevier, vol. 38(7), pages 3198-3210, July.
    26. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
    27. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    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. Dawn, Subhojit & Tiwari, Prashant Kumar & Goswami, Arup Kumar, 2017. "An approach for efficient assessment of the performance of double auction competitive power market under variable imbalance cost due to high uncertain wind penetration," Renewable Energy, Elsevier, vol. 108(C), pages 230-243.
    2. Chuntian Cheng & Bin Luo & Shumin Miao & Xinyu Wu, 2016. "Mid-Term Electricity Market Clearing Price Forecasting with Sparse Data: A Case in Newly-Reformed Yunnan Electricity Market," Energies, MDPI, Open Access Journal, vol. 9(10), pages 1-22, October.
    3. Lagarto, João & Sousa, Jorge A.M. & Martins, Álvaro & Ferrão, Paulo, 2014. "Market power analysis in the Iberian electricity market using a conjectural variations model," Energy, Elsevier, vol. 76(C), pages 292-305.
    4. Spodniak, Petr & Bertsch, Valentin, 2017. "Determinants of power spreads in electricity futures markets: A multinational analysis," Papers WP580, Economic and Social Research Institute (ESRI).
    5. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    6. Ambec, Stefan & Crampes, Claude, 2015. "Decarbonizing electricity generation with intermittent sources of energy," TSE Working Papers 15-603, Toulouse School of Economics (TSE), revised Jul 2017.
    7. Chang-Gi Min & Jong Keun Park & Don Hur & Mun-Kyeom Kim, 2015. "The Economic Viability of Renewable Portfolio Standard Support for Offshore Wind Farm Projects in Korea," Energies, MDPI, Open Access Journal, vol. 8(9), pages 1-20, September.
    8. Ben-Moshe, Ori & Rubin, Ofir D., 2015. "Does wind energy mitigate market power in deregulated electricity markets?," Energy, Elsevier, vol. 85(C), pages 511-521.
    9. G P Girish & Aviral Kumar Tiwari, 2016. "A comparison of different univariate forecasting models forSpot Electricity Price in India," Economics Bulletin, AccessEcon, vol. 36(2), pages 1039-1057.

    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:eee:energy:v:59:y:2013:i:c:p:676-688. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.journals.elsevier.com/energy .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.