Decomposing the Effect of Renewables on the Electricity Sector



Renewables offer the potential for a dramatic reduction in electricity sector pollution, and continued cost reductions in these technologies may provide lower electricity prices. Yet, the growth of renewables is not without concern. Predominant renewable resources possess unique characteristics---zero marginal cost, intermittency, and uncertainty---that may pose both technical and economic challenges to the operation of electricity grids. In this paper, we examine wind generation and wholesale electricity prices in the Texas electricity market, which features the greatest penetration of wind generation among all US electricity markets at nearly 25%. We first estimate the overall effect of wind generation on electricity prices and price volatility. We then decompose these effects by estimating how each of these unique characteristics impacts electricity market prices and volatility. We find that increases in wind generation reduce both price levels and price volatility, driven by its zero marginal cost, and these effects are heterogeneous by hour of day. The uncertainty of wind generation reinforces the price effect, with unforecast wind generation yielding greater effects on price levels. Both intermittency and uncertainty have countervailing effects that increase price volatility on average, yielding a smaller volatility reduction than would occur if wind generation was consistent and predictable.

Dr. Woerman is an Assistant Professor of Resource Economics at the University of Massachusetts Amherst. He studies energy and environment economics and industrial organization with a focus on electricity, groundwater, and climate. His recent research examines the role of energy technologies on strategic firm behavior and market outcomes in wholesale electricity markets; how increasing groundwater pumping costs affect farm pumping and cropping decisions; and the design of carbon markets and other environmental policies. He has also developed applied econometric methods for use in empirical work, including tools for designing field experiments using panel data. Dr. Woerman holds a PhD in Agricultural and Resource Economics from the University of California, Berkley.


Thursday, November 4, 2021 - 4:00pm
Kellog Room ELab 2