Wind Power Expansion and Regional Allocative Efficiency among Fossil-Fuel Electricity Generators

Abstract

Integrating wind power incurs more incidences of transmission congestion and demands more generation fleet flexibility, which may impose a negative effect on how regional production is allocated among fossil fuel electricity generators (i.e., regional allocative efficiency). Exploring exogenous variations in wind power generation conditional on wind turbine capacity, we analyze wind-induced allocative efficiency loss by comparing a US regional electricity market with a sufficient rise in wind power to one without. Results show that the utilization of fossil fuel power generators becomes less sensitive to their costs as the share of wind power increases. This effect is more pronounced when wind power generation is more volatile and when transmission capacity is less sufficient. We calculate the benefit of transmission capacity expansion from mitigating such inefficiency. If the wind share increases by 30%, our simulation results show that a 20% increase in transmission capacity would save regional production cost by 633 million dollars, amounting to 13.1% of the total production cost incurred in the market. Our calculation suggests that transmission construction costs per mile can be paid back in 13 years even when only the benefit from mitigating allocative inefficiency is considered.

Keywords: Wind Power; Electricity Industry; Supply-side Allocative Efficiency

JEL Classification: L94, Q20, Q42