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Wind Turbine Shutdowns and Upgrades in Denmark: Timing Decisions and the Impact of Government Policy

Abstract:
For policymakers, an important long-run question related to the development of renewable industries is how government policies affect decisions regarding the scrapping or upgrading of existing assets. This paper develops a dynamic structural econometric model of wind turbine owners' decisions about whether and when to add new turbines to a pre-existing stock, scrap an existing turbine, or replace old turbines with newer versions (i.e., upgrade). We apply our model to owner-level panel data for Denmark over the period 1980-2011 to estimate the underlying profit structure for small wind producers (who constitute the vast majority of turbine owners in the Danish wind industry during this time period), and evaluate the impact of technology and government policy on wind industry development. Our structural econometric model explicitly takes into account the dynamics and interdependence of shutdown and upgrade decisions, and generates parameter estimates with direct economic interpretations. Results from the model indicate that the growth and development of the Danish wind industry were driven primarily by government policies as opposed to technological improvements. We use the parameter estimates to simulate counterfactual policy scenarios in order to analyze the relative effectiveness and cost-effectiveness of the Danish feed-in-tariff and replacement certificate programs. Results show that both of these policies significantly impacted the timing of shutdown and upgrade decisions made by small wind producers and accelerated the development of the wind industry in Denmark. We also find that when compared with the feed-in-tariff; a declining feed-in-tariff; and the replacement certificate program and the feed-in-tariff combined, the replacement certificate program was the most cost-effective policy both for increasing payoffs of small wind producers and also for decreasing carbon emissions.

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Keywords: Wind energy, Dynamic structural econometric model

DOI: 10.5547/01956574.41.3.jcoo

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Published in Volume 41, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.