“Decomposing the Effect of Renewables on the Electricity Sector”
Paige Weber* (University of North Carolina at Chapel Hill) and Matt Woerman (University of Massachusetts Amherst)
Renewables offer the potential for a dramatic reduction in electricity sector pollution, and continued cost reductions in these technologies may provide lower electricity prices. Yet, the growth of renewables is not without concern. Predominant renewable resources possess unique characteristics—zero marginal cost, intermittency, and uncertainty—that may pose both technical and economic challenges to the operation of electricity grids. In this paper, we examine wind generation and wholesale electricity prices in the Texas electricity market, which features the greatest penetration of wind generation among all US electricity markets at nearly 20%. We estimate the overall effect of wind generation on electricity prices and price dispersion and then decompose these effects in terms of wind’s unique characteristics. We find that the zero marginal cost property of wind generation reduces both price levels and price dispersion and that these effects are heterogeneous by hour of day. Unforecast wind generation has over three times the effect on price levels as forecast wind, but hour-over-hour changes in wind generation have the same price effect as consistent wind generation. Finally, we find that the price effect from wind’s zero marginal cost property mirrors the price effect of a reduction of demand, but errors in wind forecasts and demand forecasts have unique effects.