The Internal and External Costs of Wind Intermittency

Mar Reguant (Northwestern University)

December 3, 2018, 14:00–15:30

Room MS 001

Industrial Organization seminar


The economics literature has focused on quantifying the marginal value of renewables by looking at their market value as a decrease in energy market price and environmental value as a reduction of emissions. However, variable renewable energy adds integration costs due to its intermittency that need to be accounted for to design the optimal generation mix. This paper analyzes the costs of wind intermittency in the context of the Iberian Electricity Market (IEM). Exploiting the market design of the IEM, we define two types of intermittency costs: external and internal. First, external costs are charged to final consumers as part of operational costs. Second, internal costs are accounted for by firms when making their decisions and they penalize last-minute imbalances. Using detailed data from the IEM, we empirically estimate the impact of wind generation and wind intermittency on external costs for different levels of wind integration. Moreover, we show that firms respond to penalties by reducing their deviations. Our paper demonstrates that both wind generation and wind intermittency have a positive average impact on external and internal costs. Therefore, failing to account for these integration costs overstates the marginal value of wind. Joint with Lola Segura.