How does market power affect the impact of large scale wind investment in 'energy only' wholesale electricity markets?

Abstract

In the short run, it is well known that increasing wind penetration is likely to reduce spot market electricity prices due to the merit order effect. The long run effect is less clear because there will be a change in new capacity investment in response to the wind penetration. In this paper we examine the interaction between capacity investment, wind penetration and market power by first using a least-cost generation expansion model to simulate capacity investment with increasing amounts of wind generation, and then using a computer agent-based model to predict electricity prices in the presence of market power. We find the degree to which firms are able to exercise market power depends critically on the ratio of capacity to peak demand. For our preferred long run generation scenario we show market power increases for some periods as wind penetration increases however the merit order counteracts this with the results that prices overall remain flat. Returns to peakers increase significantly as wind penetration increases. The market power in turn leads to inefficient dispatch which is exacerbated with large amounts of wind generation.