Location, Location, Location and Correlation: a Gift of Nature

Abstract

We demonstrate that the price-quantity correlation, a factor so far neglected, is relevant for wind energy developers when selecting the investment location. Using an intraday dataset of 1.4 million observations from 60 UK wind farms (2006-2019), we find significant correlation differences. We introduce a model that measures the (ceteris paribus) extra revenue earned due to these differences and a theoretical real options model that evaluates wind energy investments considering this correlation. Both models confirm that a higher correlation enhances wind farms value and that this location correlation premium is indeed a gift of nature.

Keywords: Price-Quantity Correlation; Electricity Price; Monopsony Hypothesis; Wind En- ergy Power; Wind Energy Production.

JEL Classification: Q42, Q56, L78, O13, R58