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The Optimal Share of Variable Renewables: How the Variability of Wind and Solar Power affects their Welfare-optimal Deployment

Open Access Article

Abstract:
This paper estimates the welfare-optimal market share of wind and solar power, explicitly taking into account their output variability. We present a theoretical valuation framework that consistently accounts for the impact of fluctuations over time, forecast errors, and the location of generators in the power grid on the marginal value of electricity from renewables. Then the optimal share of wind and solar power in Northwestern Europe's generation mix is estimated from a calibrated numerical model. We find the optimal long-term wind share to be 20%, three times more than today; however, we also find significant parameter uncertainty. Variability significantly impacts results: if winds were constant, the optimal share would be 60%. In addition, the effect of technological change, price shocks, and policies on the optimal share is assessed. We present and explain several surprising findings, including a negative impact of CO2 prices on optimal wind deployment.

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Energy Specializations: Renewables; Renewables – Wind ; Renewables – Solar ; Electricity – Generation Technologies; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
Q2 -
Q51 - Valuation of Environmental Effects
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

DOI: 10.5547/01956574.36.1.6

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Published in Volume 36, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.