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The Hidden System Costs Of Wind Generation In A Deregulated Electricity Market

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  • Mount, Timothy D.
  • Maneevitjit, Surin
  • Lamadrid, Alberto J.
  • Zimmerman, Ray D.
  • Thomas, Robert J.

Abstract

Earlier research has shown that adding wind capacity to a network can lower the total annual operating cost of meeting a given pattern of loads by displacing conventional generation. At the same time, the variability of wind generation and the need for higher levels of reserve generating capacity to maintain reliability standards impose additional costs on the system that should not be ignored. The important implication for regulators is that the capacity payments [“missing money”] for eachMW of peak system load is now much higher. Hence, the economic benefits to a network of using storage, controllable load and other mechanisms to reduce the peak system load will be higher with high penetrations of wind generation. These potential benefits are illustrated in a case study using a test network and a security constrained OPF with endogenous reserves (SuperOPF). The capabilities of the SuperOPF provide a consistent economic framework for evaluating Operating Reliability in real-time markets and System Adequacy for planning purposes. The scenarios considered make it possible to determine 1) the amount of conventional generating capacity needed to meet the peak system load and maintain System Adequacy, and the amount of wind dispatched, 2) total payments by customers in the Wholesale Market, and the amount of missing money paid to generators to maintain their Financial Adequacy, 3) changes in the congestion rents for transmission that are collected by the system operator, and finally, 4) the total annual system costs paid by customers directly in the Wholesale Market and, indirectly, as missing money. The results show that the benefits (i.e. the reduction in the total annual system costs) from making an investment in wind capacity and/of upgrading a tie line are very sensitive to 1) how much of the inherent variability of wind generation is mitigated, and 2) how the missing money paid to conventional generators is determined (e.g. comparing a regulated market with a deregulated market).

Suggested Citation

  • Mount, Timothy D. & Maneevitjit, Surin & Lamadrid, Alberto J. & Zimmerman, Ray D. & Thomas, Robert J., 2011. "The Hidden System Costs Of Wind Generation In A Deregulated Electricity Market," Working Papers 126529, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:126529
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    References listed on IDEAS

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    1. Bird, Lori & Chapman, Caroline & Logan, Jeff & Sumner, Jenny & Short, Walter, 2011. "Evaluating renewable portfolio standards and carbon cap scenarios in the U.S. electric sector," Energy Policy, Elsevier, vol. 39(5), pages 2573-2585, May.
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    Cited by:

    1. Stephan Nagl, Michaela Fursch, and Dietmar Lindenberger, 2013. "The Costs of Electricity Systems with a High Share of Fluctuating Renewables: A Stochastic Investment and Dispatch Optimization Model for Europe," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    2. Andreas Gerster, 2016. "Negative price spikes at power markets: the role of energy policy," Journal of Regulatory Economics, Springer, vol. 50(3), pages 271-289, December.
    3. Hanson, Donald & Schmalzer, David & Nichols, Christopher & Balash, Peter, 2016. "The impacts of meeting a tight CO2 performance standard on the electric power sector," Energy Economics, Elsevier, vol. 60(C), pages 476-485.
    4. Narbel, Patrick A., 2014. "Rethinking how to support intermittent renewables," Discussion Papers 2014/17, Norwegian School of Economics, Department of Business and Management Science.
    5. Hirth, Lion & Ueckerdt, Falko, 2013. "Redistribution effects of energy and climate policy: The electricity market," Energy Policy, Elsevier, vol. 62(C), pages 934-947.
    6. Lamadrid, Alberto J. & Maneevitjit, Surin & Mount, Timothy D., 2016. "The economic value of transmission lines and the implications for planning models," Energy Economics, Elsevier, vol. 57(C), pages 1-15.
    7. Wooyoung Jeon & Alberto Lamadrid & Jung Mo & Timothy Mount, 2015. "Using deferrable demand in a smart grid to reduce the cost of electricity for customers," Journal of Regulatory Economics, Springer, vol. 47(3), pages 239-272, June.
    8. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
    9. Paul L. Joskow, 2011. "Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies," American Economic Review, American Economic Association, vol. 101(3), pages 238-241, May.
    10. Joan Batalla-Bejerano & Elisa Trujillo-Baute, 2015. "Analysing the sensitivity of electricity system operational costs to deviations in supply and demand," Working Papers 2015/8, Institut d'Economia de Barcelona (IEB).
    11. Dowds, Jonathan & Hines, Paul & Ryan, Todd & Buchanan, William & Kirby, Elizabeth & Apt, Jay & Jaramillo, Paulina, 2015. "A review of large-scale wind integration studies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 49(C), pages 768-794.
    12. Lamadrid, Alberto J. & Mount, Tim, 2012. "Ancillary services in systems with high penetrations of renewable energy sources, the case of ramping," Energy Economics, Elsevier, vol. 34(6), pages 1959-1971.
    13. Peeter Pikk & Marko Viiding, 2013. "The dangers of marginal cost based electricity pricing," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 13(1), pages 49-62, July.
    14. 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.
    15. Lauren Knapp & Jacob Ladenburg, 2015. "How Spatial Relationships Influence Economic Preferences for Wind Power—A Review," Energies, MDPI, Open Access Journal, vol. 8(6), pages 1-25, June.
    16. Zafirakis, Dimitrios & Chalvatzis, Konstantinos J. & Baiocchi, Giovanni & Daskalakis, George, 2013. "Modeling of financial incentives for investments in energy storage systems that promote the large-scale integration of wind energy," Applied Energy, Elsevier, vol. 105(C), pages 138-154.
    17. Gerster, Andreas, 2016. "Negative price spikes at power markets: The role of energy policy," Ruhr Economic Papers 636, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    18. Okazaki, Toru & Shirai, Yasuyuki & Nakamura, Taketsune, 2015. "Concept study of wind power utilizing direct thermal energy conversion and thermal energy storage," Renewable Energy, Elsevier, vol. 83(C), pages 332-338.

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    Keywords

    Environmental Economics and Policy; Resource /Energy Economics and Policy;

    JEL classification:

    • F0 - International Economics - - General

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