FEEM working papers "Note di lavoro" series
2017 .010

Wind, Storage, Interconnection and the Cost of Electricity Generation


Authors: Valeria Di Cosmo, Laura Malaguzzi Valeri
Series: Energy Scenarios and Policy
Editor: Manfred Hafner
Keywords: Wind Generation, Constraints, Storage, Interconnection, Subsidies
JEL n.: L94, Q42

Abstract

We evaluate how increasing wind generation affects wholesale electricity prices, balancing payments and the cost of subsidies using the Irish Single Electricity Market (SEM) as a test system, with hourly data from 1 January 2008 to 28 August 2012. We model the spot market using a system of seemingly unrelated regressions (SUR) where the regressions are the 24 hours of the day. Wind has a negative impact on the system marginal price, with every MWh increase in wind generation (equal to about 0.2% of the average wind generation in our sample) leading to a decrease of the system marginal price of €0.018/MWh, or about 0.3% of its average value. We use time series models to analyse the balancing market and show that wind generation increases balancing payments, as do the forecast errors of demand and wind. Every MWh of additional wind generation is associated with an increase in constraint payments of €3.2, or about 0.01%. Lack of storage increases the impact of wind on balancing payments whereas the lack of interconnection has no effect. Overall, wind decreases costs through its effect on the electricity price more than it increases constraint payments, even when storage is on outage. The effect of wind remains positive after including the cost of subsidies given to wind generation.

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Suggested citation: Di Cosmo, V., L. Malaguzzi Valeri, (2017), 'Wind, Storage, Interconnection and the Cost of Electricity Generation', Nota di Lavoro 10.2017, Milan, Italy: Fondazione Eni Enrico Mattei

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