Wind, storage, interconnection and the cost of electricity

We evaluate how increasing wind generation affects wholesale electricity prices, balancing payments and the cost of subsidies using the Irish Single Electricity Market (SEM) as a test system, with hourly data from 1 January 2008 to 28 August 2012. We measure the effect of wind on the marginal cost of generating electricity using a system of seemingly unrelated regressions (SUR) where the regressions are the 24 hours of the day. Wind has a negative impact on the system marginal price. In particular, every MWh increase in wind generation (equal to about 0.2% of the average wind generation in our sample) leads to a decrease of the system marginal price of €0.018/MWh, or about 0.3% of its average value in our sample. Using time series models we show that wind generation increases balancing payments, as do the forecast errors of demand and wind. Lack of storage significantly increases the impact of wind on balancing payments whereas the lack of interconnection has no effect. Overall, wind decreases costs through its effect on the electricity price more than it increases constraint payments, even when storage is on outage. The effect of wind remains positive after including the subsidies given to wind generation.