Extract from Claverton Energy Group Archives, by Paul Frederik Bach, ex director Danish Western National Grid.
On 12 May 2010 21:13, Paul-Frederik Bach <pfbach@profibermail.dk> wrote:
Dear all,
The debate on the economy of wind power seems to be never ending. Observations of wind power output and spot prices indicate that wind power creates low prices during periods of high wind. It is a simple and popular interpretation that wind power has caused reduced spot prices and thus contributed to reduced consumer prices of electricity.The effect of wind power on spot prices is supposed to contribute significantly to the competitive position of wind energy. It has been claimed that this effect is about to outweigh the subsidies for wind power.Several analyses have been made in order to quantify the effect. Now Pöyry has presented a review of works in a report for EWEA with the neutral title: Wind Energy and Electricity Prices.
The price effect has been estimated by six of the references. The results vary from 3 to 23 €/MWh. I think that the variation indicates the uncertainty of the estimates.
There is no uncertainty in the heading on EWEA’s home page: Wind energy reduces electricity prices, says independent study.This is a good story, and it is natural to EWEA to emphasize this message. My story is less simple and less interesting.My work for Renewable Energy Foundation in London last year (  Wind Power and Spot Prices: German and Danish Experience 2006-2008.  See http://www.ref.org.uk/Publication/0/1  ) showed that spot prices depend on several other factors than inflow of wind power, primarily electricity demand, grid transfer capability, congestion management policy and large power companies with dominating market power.An electricity market must be carefully monitored and controlled. The spot market stability may be weak due to insufficient transmission grid capacity. In weak markets there is the risk that a few large suppliers can execute market power by demanding too high prices. Another risk is that a large share of wind power causes price volatility leading to very high and very low market prices.
The question is if price volatility is good or bad. Price reductions are supposed to be good for consumers, but extreme variations are risky to market participants and they may prefer bilateral trade. Reduced participation in the spot market will disturb the optimal allocation of resources and thus be harmful consumer interests.
I am convinced that for wind energy shares exceeding about 20% new types of flexible electricity demand will be required in order to maintain reasonably stable spot market prices and to guarantee the best possible utilisation of the wind power. Otherwise increased subsidies from the electricity consumers will be required.
Regards,
Paul-Frederik