The Hidden System Costs of Wind Generation in a Deregulated Electricity Market

Abstract

Earlier research has shown that adding wind capacity to a network can lower the total annual operating cost of meeting a given pattern of loads by displacing conventional generation. At the same time, the variability of wind generation and the need for higher levels of reserve generating capacity to maintain reliability standards impose additional costs on the system that should not be ignored. The important implication for regulators is that the capacity cost of each MW of peak system load is now much higher. Hence, the economic benefits to a network of using storage and controllable load to reduce the peak system load will be higher with high penetrations of wind generation. These potential benefits will be illustrated in a case study using a test network and the SuperOPF. An important feature of the SuperOPF is that the amount of conventional generating capacity needed to maintain Operating Reliability is determined endogenously, and as a result, it is possible to determine the net social benefits of relying more on an intermittent source of generation, such as wind capacity, that lowers operating costs but increases the cost of maintaining System Adequacy. The capabilities of the SuperOPF provide a consistent economic framework for evaluating Operating Reliability in real-time markets and System Adequacy for planning purposes. Basically, a financially viable investment requires that the reductions in the total annual costs of the existing system should be larger than the annualized cost of financing the addition of, for example, wind generation to a network. The scenarios considered make it possible to determine 1) the amount of conventional generating capacity needed to meet the peak system load and maintain System Adequacy, 2) the amount of missing money paid to generators to maintain Financial Adequacy, 3) changes in the congestion rents for transmission that are collected by the system operator, and finally, 4) the total annual system costs paid by customers directly in the Wholesale Market and, indirectly, as missing money. The results show that the benefits (i.e. the reduction in the total annual system costs) from making an investment in wind capacity and/of upgrading a tie line are very sensitive to 1) how much of the inherent variability of wind generation has to be accommodated on the network, and 2) how the missing money paid to conventional generators is determined (e.g. comparing a regulated market and a deregulated market).