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Why Wind Is Not Coal: On the Economics of Electricity Generation

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Electricity is a paradoxical economic good: it is highly homogeneous and heterogeneous at the same time. Electricity prices vary dramatically between moments in time, between location, and according to lead-time between contract and delivery. This three-dimensional heterogeneity has implication for the economic assessment of power generation technologies: different technologies, such as coal-fired plants and wind turbines, produce electricity that has, on average, a different economic value. Several tools that are used to evaluate generators in practice ignore these value differences, including "levelized electricity costs", "grid parity", and simple macroeconomic models. This paper provides a rigorous and general discussion of heterogeneity and its implications for the economic assessment of electricity generating technologies. It shows that these tools are biased, specifically, they tend to favor wind and solar power over dispatchable generators where these renewable generators have a high market share. A literature review shows that, at a wind market share of 30-40%, the value of a megawatt-hour of electricity from a wind turbine can be 20-50% lower than the value of one megawatt-hour as demanded by consumers. We introduce "System LCOE" as one way of comparing generation technologies economically.

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

JEL Codes: Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices

Keywords: power generation, electricity sector, integrated assessment modeling, wind power, solar power, variable renewables, integration costs, welfare economics, power economics, levelized electricity cost, LCOE, grid parity

DOI: 10.5547/01956574.37.3.lhir

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Published in Volume 37, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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