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This paper provides a comprehensive discussion of the market value of variable renewable energy (VRE). The inherent variability of wind speeds and solar radiation affects the price that VRE generators receive on the market (market value). During windy and sunny times the additional electricity supply reduces the prices. Because the drop is larger with more installed capacity, the market value of VRE falls with higher penetration rate. This study aims to develop a better understanding on how the market value with penetration, and how policies and prices affect the market value. Quantitative evidence is derived from a review of published studies, regression analysis of market data, and the calibrated model of the European electricity market EMMA. We find the value of wind power to fall from 110% of the average power price to 50–80% as wind penetration increases from zero to 30% of total electricity consumption. For solar power, similarly low value levels are reached already at 15% penetration. Hence, competitive large-scale renewable deployment will be more difficult to accomplish than as many anticipate.
Electricity is a peculiar economic good, the most important reason being that it needs to be supplied at the very moment of consumption. As a result, wholesale electricity prices fluctuate widely at hourly or sub-hourly time scales, regularly reaching multiples of their average, and even turn negative. This paper examines whether the demand for electricity responds to such price variations in the very short term. To solve the classical identification problem when estimating a demand curve, we use weather-driven wind energy generation as an instrument. Our robustness checks confirm that wind energy is indeed a strong and valid instrument. Using data from Germany, we estimate that a 1 €/MWh increase in the wholesale electricity price causes the aggregate electricity demand to decline by 67–80 MW or 0.12–0.14%, contradicting the conventional wisdom that electricity demand is highly price-inelastic. These estimates are statistically significant and robust across model specifications, estimators, and sensitivity analyses. At average price and demand, our estimates correspond to a price elasticity of demand of about –0.05. Comparing situations with high and low wind energy (5–95th percentile), we estimate that prices vary by 26 €/MWh, and the corresponding demand response to wholesale electricity prices is about 2 GW, or 2.6% of peak load. Our analysis suggests that the demand response in Germany can be attributed primarily to industrial consumers.