Variance Analysis of Wind and Natural Gas Generation under Different Market Structures: Some Observations

Technical Report · Sun Jan 01 04:00:00 EST 2012

DOI:https://doi.org/10.2172/1033025· OSTI ID:1033025

Bush, Brian ^[1]; Jenkin, Thomas ^[1]; Lipowicz, David ^[1]; Arent, Douglas J. ^[1]; Cooke, Roger ^[2]

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1. National Renewable Energy Laboratory (NREL), Golden, CO (United States)
2. Resources for the Future, Washington, DC (United States)

An important area of current research is whether large-scale penetration of variable renewable generation such as wind and solar power pose economic and operational burdens on the electricity system. In such scenarios, this issue has also raised considerable interest in the potential role and value of electricity storage as a method of mitigating variability in generation associated with the inherently variable nature of these forms of generation. At the same time, a number of studies have pointed to the potential benefits of renewable generation as a hedge against the volatility and potential escalation of fossil fuel prices. Prior research and this work suggest that the lack of correlation of renewable energy costs with fossil fuel prices means that adding large amounts of wind or solar generation may also reduce the volatility of system-wide electricity costs. Such variance reduction in overall system costs may be of significant value to consumers due to risk aversion. In contrast to this observation, other studies have focused on returns in restructured markets and noted that, in deregulated markets, baseload natural gas power generation may be relatively more attractive to investors because-unlike wind generation-peak power prices are often strongly correlated to natural gas prices. The analysis in this report recognizes that the potential value of risk mitigation associated with wind generation and natural gas generation may depend on whether one considers the consumer's perspective or the investor's perspective and whether the market is regulated or deregulated. We analyze the risk and return trade-offs for wind and natural gas generation for deregulated markets based on hourly prices and load over a 10-year period using historical data in the PJM Interconnection (PJM)2 from 1999 to 2008. Similar analysis is then simulated and evaluated for regulated markets under certain assumptions. Estimating the absolute value, as opposed to the relative value, of variance reduction will also depend on assumptions about risk aversion and other consumer preferences, such as loss aversion, and this is discussed.

• Research Organization: National Renewable Energy Laboratory (NREL), Golden, CO (United States)
• Sponsoring Organization: USDOE Office of Energy Efficiency and Renewable Energy (EERE)
• DOE Contract Number: AC36-08GO28308
• OSTI ID: 1033025
• Report Number(s): NREL/TP--6A20-52790
• Country of Publication: United States
• Language: English

Related Subjects

03 NATURAL GAS
17 WIND ENERGY
32 ENERGY CONSERVATION, CONSUMPTION, AND UTILIZATION
ECONOMICS
ELECTRICITY
ENERGY ACCOUNTING
FOSSIL FUELS
MARKET
MITIGATION
NATURAL GAS
PRICES
RENEWABLE ENERGY SOURCES
SOLAR ENERGY
VOLATILITY
WIND POWER
deregulated markets
regulated markets
risk mitigation
solar energy
variance analysis
wind energy