Price responsiveness of solar and wind capacity demands

Abstract

Accurate estimates of the price responsiveness of residential, commercial, and industrial electricity demands are essential for energy policy modelling, integrated resource planning, and determining a competitive wholesale electricity market's generation levels, prices, and capacity investments. Hence, we estimate the own-price elasticities of solar and wind capacity demands of a load serving entity (LSE) that provides retail electricity service, thereby answering two interrelated research questions: (1) does solar capacity demand far exceed wind capacity demand? and (2) are solar and wind capacity demands price-elastic? Inspired by the theory of input demand under input price uncertainty, our innovative methodology integrates (a) wholesale spot energy price forecasts by time of day; (b) pseudo data found by minimizing a LSE's annual risk-adjusted budget for procuring solar and wind capacities; and (c) econometric analysis of (b) to estimate the extent of substitutability between solar and wind capacities and the own-price elasticities of solar and wind capacity demands. Using Texas as an illustrative example, we find that when solar and wind power purchase agreements have similar energy prices, solar capacity demand is approximately four times wind capacity demand. Further, the own-price elasticity estimates are −5.34 for solar capacity demand and −5.65 for wind capacity demand. As a result, solar and wind capacity demands tend to substantially grow (shrink) in response to declining (rising) solar and wind energy prices. This lends support to proposals to raise solar and wind energy prices for mitigating the adverse effects of large-scale variable renewable energy development on an electric grid's efficient operation and system reliability. However, adopting such proposals also slows the grid's pace of decarbonization, thus underscoring the policy and regulatory challenges in the quest for a clean and sustainable electricity future. Hence, our policy recommendation of price managing solar and wind capacity demands is a topic of policy debate that deserves the attention of an electric grid's stakeholders.