Integration Costs and the Value of Wind Power

Abstract

The integration of wind and solar generators into power systems causes “integration costs” for grids, balancing services, reserve capacity, more flexible operation of thermal plants, and reduced utilization of the capital stock embodied in infrastructure. This paper proposes a valuation framework to analyze and quantify these integration costs. We propose a new definition of integration costs based on the marginal economic value of electricity that allows a welfare-economic interpretation. Furthermore, based on the principal characteristics of wind and solar power, temporal variability, uncertainty, and location-specificity, we suggest a decomposition of integration costs that exhaustively and consistently accounts for all costs that occur at the level of the power system. Finally, we review 100 published studies to extract estimates of integration costs and its components. At high penetration rates, say a wind market share of 30-40%, integration costs are found to be 25-35 €/MWh, however, these estimates are subject to high uncertainty. The largest single cost component is the reduced utilization of capital embodied in thermal plant, which most previous studies have not accounted for. - We propose a new definition of integration costs of wind and solar power. - Our definition is based on the marginal economic value of electricity. - We suggest a consistent, operationable, robust & comprehensive cost decomposition. - Integration costs are large: 25-35 €/MWh at 30-40% wind, according to a lit review. - A major driver is the reduced utilization of capital embodied in thermal plants.