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The Hidden System Costs of Wind Generation in a Deregulated Electricity Market

Abstract:
Earlier research has shown that adding wind generation to a network can lower the total annual operating cost by displacing conventional generation. At the same time, the variability of wind generation and the need for higher levels of reserve generating capacity to maintain reliability standards impose additional costs on the system that should not be ignored. The important implication for regulators is that the capacity payments ["missing money"] for each MW of peak system load are now much higher. Hence, the economic benefits of reducing the peak system load using storage or controllable demand will be higher with high penetrations of wind generation. These potential benefits are illustrated in a case study using a test network and a security constrained Optimal Power Flow (OPF) with endogenous reserves (SuperOPF). The results show that the benefits are very sensitive to 1) how much of the inherent variability of wind generation is mitigated, and 2) how the missing money is determined (e.g. comparing regulation with deregulation).Keywords: Electricity markets, Wind generation, Optimum dispatch, Endogenous reserve capacity, Missing money, Total annual system costs.

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Energy Specializations: Electricity – Generation Technologies; Electricity – Markets and Prices ; Electricity – Policy and Regulation; Renewables – Wind

JEL Codes:
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q51 - Valuation of Environmental Effects

Keywords: Electricity markets, Wind generation, Optimum dispatch, Endogenous reserve capacity, Missing money, Total annual system costs

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-6

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Published in Volume 33, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.