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).

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