High Frequency Evidence on the Effects of Wind Power Generation on the Electricity Price

Abstract

Exploiting the hourly data from the New York Independent System Operator (NYISO) database, we model the impact of wind generation on electricity spot prices and on their dynamic volatility behavior while taking into account the variations in zonal wind output. We find that the growing share of wind generation not only leads to a decline in electricity prices, but also results in an increased price volatility. The results indicate that a 1% rise in the aggregate wind power generation leads to a 0.012% decline in the average NYISO prices while the mentioned price effect in the wind producing zones is estimated to be a 0.055% to 0.085% downward adjustment of the zonal prices for a 1% growth in wind generation within the zone. Our findings have two implications: First, the increasing downward pressure on electricity prices due to the growing share of wind generation can challenge the financial sustainability of the electricity markets in the long-run, which highlights the need to proceed towards an effective market structure to ensure the recovery of fixed generation costs. Second, the induced price volatility implies that effective use of price risk hedging strategies should be considered by all actors in the power markets.