Increasing or Diversifying Risk? Tail Correlations, Transmission Flows and Prices across Wind Power Areas

Abstract

As wind power costs have declined, capacity has grown quickly, often times in adjacent areas. Price and volatility risk from wind power’s intermittency can be mitigated through geographic diversification and transmission. But wind power generation has a fat-tailed and right-skewed distribution. In this article we investigate how geographic diversification of wind power and the effect of wind power on market prices varies across the distribution of production. In a case study from Denmark and Sweden, we show that during tail-end production periods, correlations between areas increase substantially as does congestion in the transmission network. This leads to highly non-linear price effects. The marginal effect of wind power on the local prices is shown to be substantially higher at the 10th decile of wind power production. This has implications for valuation models of wind power projects and for operations of electricity markets with high penetrations of wind power.