The long-term impact of wind power on electricity prices and generating capacity

This paper uses a market equilibrium model to calculate how the mix of generating capacity would change if large amounts of intermittent renewables are built in Great Britain, and what this means for operating patterns and the distribution of prices over time. The model is calibrated to 2020 data for wind and demand (from Green and Vasilakos, Energy Policy, 2010) with costs from Mott MacDonald´s 2010 report to the Department of Energy and Climate Change. If generators bid their marginal costs, we find that the changes to the capacity mix are much greater than the changes to the pattern of prices. Thermal capacity falls only slightly in response to the extra wind capacity, and there is a shift towards power stations with higher variable costs (but lower fixed costs). The changes to the pattern of prices, once capacity has adjusted, are relatively small. This is because each type of capacity needs to cover its costs from its market revenues, and so average prices over the period for which it operates must equal the average level of those costs. In an optimal system, the amounts of each type of capacity are chosen so that stations are operating for the number of hours for which they have lower costs than alternative station types. The number of each type of station needed to achieve this depends on the load-duration curve, and so when this changes, so does the optimal capacity mix. The load factors that each station will achieve, given the optimal capacity mix, will not change very much, since they are constrained by the need for the stations only to run for the number of hours for which they are the cheapest option. With similar load factors, the station´s average costs will not change very much, and so the average revenue required over a given part of the load-duration curve will also change little. In an oligopolistic setting, strategic generators will choose lower levels of capacity, although they will still want a cost-minimizing capacity mix, given their patter- - ns of operation. If wind output does not receive the market price, then mark-ups on thermal generation will be lower in a system with large amounts of wind power, since the generators will have less incentive to raise their prices for the lower amount of conventional power that they are selling. This would apply to countries that use a feed-in tariff to pay for renewable power.