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Selling Wind

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Abstract:
We investigate the strategic behavior of wind producers in the presence of uncertain wind resource availability, where wind availability is correlated across firms. We study how the level of correlation between different firms' wind resources impacts strategy and market outcomes. The main insight of our analysis is that increasing heterogeneity in resource availability improves social welfare, as a function of its effects both on improving diversification and on reducing withholding by firms. We show that this insight is robust for common assumptions regarding electricity demand. The model is also used to analyze the effect of wind resource heterogeneity on firm profits and opportunities for collusion. Finally, we analyze the impacts of improving public information and weather forecasting; enhanced public forecasting increases welfare, but it is not always in the best interests of strategic producers.

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Keywords: Energy finance, Commodity market, Market power, Pricing wind, Diversification, Investment, Public forecasting, Collusion, Electricity markets, Renewable energy

DOI: 10.5547/01956574.42.1.akak

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Published in Volume 42, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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