An Illustrative Note on the System Price Effect of Wind and Solar Power: The German Case

Abstract

Exposing wind and solar power to the market price signal allows for cost-efficient investment decisions, as it incentivizes investors to account for the marginal value ( $$MV^{el}$$ ) of renewable energy technologies. As shown by Lamont (2008), the $$MV^{el}$$ of wind and solar power units depends on their penetration level. More specifically, the $$MV^{el}$$ of wind and solar power units is a function of the respective unit’s capacity factor and the covariance between its generation profile and the system marginal costs. The latter component of the $$MV^{el}$$ (i.e., the covariance) is found to decline as the wind and solar power penetration increases, displacing dispatchable power plants with higher short-run marginal costs of power production and thus reducing the system marginal costs in all generation hours. This so called ‘system price effect’ is analyzed in more detail in this paper. The analysis complements the work of Lamont (2008) in two regards. First of all, an alternative expression for the $$MV^{el}$$ of wind and solar power units is derived, which shows that the $$MV^{el}$$ of fluctuating renewable energy technologies depends not only on their own penetration level but also on a variety of other parameters that are specific to the electricity system. Second, based on historical wholesale prices and wind and solar power generation data for Germany, a numerical ‘ceteris paribus’ example for Germany is presented which illustrates that the system price effect is already highly relevant for both wind and solar power generation in Germany.