All you want to know about the Economics of Wind Power

Abstract

Mitigating climate change will require reduced use of fossil fuels to generate electricity. To do so and eschewing nuclear power, countries have turned to wind energy. In this paper, the economics of wind energy are investigated by first examining the social costs and benefits of replacing fossil fuels, with the deciding factor favoring wind based on externalities. The externality costs of fossil fuels relate to adverse health effects of pollutants and the contribution of carbon dioxide emissions to global warming, while the adverse spillovers from wind energy relate to the nature of wind turbines. In general, economic studies find that, when allowance is made for the negative externalities associated with fossil fuel burning, the benefits of wind energy exceed their costs, thereby justifying public intervention. Wind energy is only viable because of generous subsidies, which are shown to be generally effective in bringing about the investments governments desire. Economic studies that only examine costs and benefits on a macro scale, however, neglect or underestimate the indirect costs of wind energy, which are associated with the impact that intermittent supply has on the operation and management of an electricity grid. To gain a handle on these costs, electricity systems are discussed from generation through transmission and distribution to retail demand. One aspect of this discussion relates to the adequacy of investment in marginal (peak time) generating capacity. In the analysis, it is assumed that the wholesale market for electricity is competitive and that demand responds to changes in spot prices; the implications of these assumptions are also discussed. While most studies are generally optimistic about the potential for integrating wind energy, researchers have identified problems with the inability to store energy (except behind hydroelectric dams), the need for fast-responding backup generating capacity, network instability, low capacity factors for wind power, et cetera, that could limit the usefulness of wind at the high penetration rates now envisioned. Overall, it may turn out that there are economic and physical limits to the proportion of electricity that can be generated by wind and other intermittent energy sources.