The Market Value of Variable Renewables

36 Pages Posted: 28 Mar 2012

See all articles by Lion Hirth

Lion Hirth

Neon Neue Energieökonomik GmbH; Hertie School of Governance

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2012

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.

Keywords: wind power, solar power, electricity market, power generation economics, renewables, value factor, numerical modeling

JEL Classification: Q42, O13, D24, D61

Suggested Citation

Hirth, Lion, The Market Value of Variable Renewables (March 28, 2012). FEEM Working Paper No. 15.2012, Available at SSRN: https://ssrn.com/abstract=2030215 or http://dx.doi.org/10.2139/ssrn.2030215

Lion Hirth (Contact Author)

Neon Neue Energieökonomik GmbH ( email )

Karl-Marx-Platz 12
12043
Berlin, 12043
Germany

HOME PAGE: http://www.neon-energie.de

Hertie School of Governance ( email )

Friedrichstraße 180
Berlin, 10117
Germany

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