Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition

Al-Gwaiz, Majid; Chao, Xiuli; Wu, Owen Q.

doi:10.2139/ssrn.2677209

Cited by 2 publications

(2 citation statements)

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“…A string of recent papers has added nuances to this view by including considerations of output variability. Al-Gwaiz et al (2016) show that ignoring such operational factors may overstate the competitiveness of a spot market, as producers may exploit their competitors' operational constraints in their bidding strategies, and Sunar and Birge (2019) find that renewables may even increase power prices if the system-operator imposes penalties that reduce quantities of power sold to the market in the face of intermittent output. Relatedly, Twomey and Neuhoff (2010) show that incumbent conventional producers' bidding in spot and forward markets overstates the price peaks and troughs caused by intermittency and their market power may hence reduce the profitability of wind generators.…”

Section: Related Literaturementioning

confidence: 99%

Renewable Power and Electricity Prices: The Impact of Forward Markets

Peura

Bunn

2021

Management Science

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Increasing variable renewable power generation (e.g., wind) is expected to reduce wholesale electricity prices by virtue of its low marginal production cost. This merit-order effect of renewables displacing incumbent conventional (e.g., gas) generation forms the theoretical underpinning for investment decisions and policy in the power industry. This paper uses a game-theoretic market model to investigate how intermittently available wind generation affects electricity prices in the presence of forward markets, which are widely used by power companies to hedge against revenue variability ahead of near-real-time spot trading. We find that in addition to the established merit-order effect, renewable generation affects power prices through forward-market hedging. This forward effect reinforces the merit-order effect in reducing prices for moderate amounts of wind generation capacity but mitigates or even reverses it for higher capacities. For moderate wind capacity, uncertainty over its output increases hedging, and these higher forward sales lead to lower prices. For higher capacities, however, wind variability conversely causes power producers to behave less aggressively in forward trading for fear of unfavorable spot-market positions. The lower sales counteract the merit-order effect, and prices may then paradoxically increase with wind capacity despite its lower production cost. We confirm the potential for such reversals in a numerical study, suggesting new empirical questions while providing potential explanations for previously contradictory observed effects of market fundamentals. We conclude that considering the conventional merit-order effect alone is insufficient for evaluating the price impacts of variable renewable generation in the presence of forward markets. This paper was accepted by Vishal Gaur, operations management.

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Section: Related Literaturementioning

confidence: 99%

Renewable Power and Electricity Prices: The Impact of Forward Markets

Peura

Bunn

2021

Management Science

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“…The effect of tariff structures on such investments has been studied in Alizamir et al (2016), Ritzenhofen et al (2016), andKok et al (2015). The operational aspects of managing such resources are studied in Zhou et al (2014), Wu and Kapuscinski (2013), Sunar and Birge (2018) and Al-Gwaiz et al (2016). We contribute to this literature by analyzing the structural requirements for a utility tariff to induce welfare optimal and fair outcomes for the utility, the solar industry, and customers.…”

Section: Literature Reviewmentioning

confidence: 99%

That’s Not Fair: Tariff Structures for Electric Utilities with Rooftop Solar

Singh

Scheller‐Wolf

2022

M&SOM

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Problem definition: Utility regulators are grappling to devise compensation schemes for customers who sell rooftop solar generation back to the grid, balancing environmental interests and the financial interests of utilities, solar system installers, and retail customers. This is difficult: Regulatory changes made in Nevada in 2015 to protect Nevada’s utility induced SolarCity, the market leader in solar systems, to suspend local operations. We show that the choice of utility tariff structure is crucial to achieving socially desirable objectives. Academic/practical relevance: It is important for regulators to understand how tariff structure interacts with social objectives. This has implications for consumers, regulators, and industry. Methodology: We use a sequential game to analyze the regulator’s social welfare maximization problem in a market with a regulated utility; an unregulated, price-setting, profit-maximizing solar system installer; and customers who endogenously determine whether to adopt solar or not, based on utility tariffs, solar prices, and their heterogeneous usage profiles and generation potentials. Results: We illustrate that the effectiveness of tariff structures is not governed simply by the number of free tariff parameters, but by the functions these parameters serve. In particular, an effective tariff must discriminate among customer usage tiers and between customers with and without rooftop solar to achieve socially desirable outcomes. We present a tariff structure with these two characteristics and show how it can be implemented as a simple buy-all, sell-all tariff while retaining its favorable properties. We illustrate our findings numerically using data from Nevada and New Mexico, two states grappling with this issue. Managerial implications: Many utilities in the United States operate tariff structures that are missing at least one of the two identified features. Regulators must overhaul these tariff structures to adequately safeguard all stakeholders.

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Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition

Cited by 2 publications

References 44 publications

Renewable Power and Electricity Prices: The Impact of Forward Markets

Renewable Power and Electricity Prices: The Impact of Forward Markets

That’s Not Fair: Tariff Structures for Electric Utilities with Rooftop Solar

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