Wind generation contributed positively to welfare in the Spanish electricity market. There were modest negative impacts of wind on operational costs, even at relatively high levels of wind generation.
The intermittent nature of renewable energy sources, particularly wind power, requires additional services such as balancing and reserves to ensure the reliable operation of the grid. Thus, the increasing use of intermittent renewables may result in increased operating costs for electricity producers, thereby impacting the societal value of wind energy, a consideration that should be considered when designing the optimal generation mix.
Drawing on high-frequency data from the Spanish electricity market spanning from 2009 to 2018, this study quantifies the average and marginal impact of wind power on various welfare components including emission offsets, market electricity prices, operational costs, and overall welfare. The study leverages exogenous variation in hourly wind forecasts to estimate the impact of wind on intermittency costs, prices, and emissions and uses linear and semi-parametric models to model the impact of wind. The findings reveal that a 1 GWh increase in wind levels raises operational costs by approximately 0.19 EUR/MWh compared to an average of 3.85 EUR/MWh. However, the increase in operational costs is not growing with wind availability.
This study further explores whether the effect of wind on operational costs has changed over time and the extent to which such changes can be associated with explicit market design rules. Specifically, a regulatory shift in June 2014 in Spain changed the compensation model for wind energy producers from output-based to capacity-based subsidies. This change reduced incentives for wind producers to generate during high-wind conditions due to low prices, leading to lower emission reductions, but also avoided inefficient dispatch during days of excess wind supply. The results show that this policy change reduced congestion and adjustment costs by avoiding overbidding at zero prices without reducing wind output.
Figure 1: Average Welfare Effects of Wind
Focusing on welfare changes, the results point toward an increase in consumer surplus as the decline in the price of wind outweighs the negative cost associated with subsidies. In contrast, non-wind producers’ surplus is lowered** due to reduced prices, while the combined positive effect of subsidies and low marginal cost outweighs the price effect for wind producer surplus. The overall welfare effect depends on factors such as wind farm investment costs and environmental benefits from emissions reductions. The findings indicate that with investment costs of 50 EUR/MWh, the value of emissions reductions leading to an increase in welfare is 30 EUR/tCO2. If instead, with investment costs of 80 EUR/MWh, the threshold value increases to 130 EUR/tCO2.
In conclusion, over the study period, wind generation positively contributed to welfare, benefiting consumers and wind producers. Furthermore, the results indicate that changes in market design can alleviate concerns regarding wind intermittency by reducing operational costs associated with accommodating high levels of wind into the grid. Overall, the negative impact of wind on operational costs is found to be relatively modest, even at elevated levels of wind generation.
