The Market Value of Variable Renewables:

Te Maket Value of Vaiable Renewables: Te Effect of Sola and Wind Powe Vaiability on tei Relative Pice Lion Hit it@neon-enegie.de Tis is a postpint of an aticle publised in Enegy Economics licensed unde Ceative Commons BY-NC-ND. Please cite as: Hit, Lion (2013): Te Maket Value of Vaiable Renewables, Enegy Policy 38, 218-236. doi:10.1016/j.eneco.2013.02.004. Pevious vesions: USAEE Woking Pape 2110237. EUI Woking Pape 2013/36. FEEM Woking Pape 2012.015. Find moe aticles on te economics of wind and sola powe on www.neon-enegie.de/publications. Seeking advice on powe makets? Neon is a Belin-based boutique consulting fim fo enegy economics. Neon conducts model-based studies of powe makets, povides electicity pice foecasts, and oganizes seminas. www.neon-enegie.com

Te Maket Value of Vaiable Renewables Te Effect of Sola and Wind Powe Vaiability on tei Relative Pice Pape submitted to Enegy Economics Febuay 2013 Lion Hit Vattenfall GmbH & Potsdam-Institute fo Climate Impact Reseac 1 Abstact Tis pape povides a compeensive discussion of te maket value of vaiable enewable enegy (VRE). Te ineent vaiability of wind speeds and sola adiation affects te pice tat VRE geneatos eceive on te maket (maket value). Duing wind and sunny times te additional electicity supply educes te pices. Because te dop is lage wit moe installed capacity, te maket value of VRE falls wit ige penetation ate. Tis study aims to develop a bette undestanding ow te maket value wit penetation, and ow policies and pices affect te maket value. Quantitative evidence is deived fom a eview of publised studies, egession analysis of maket data, and te calibated model of te Euopean electicity maket EMMA. We find te value of wind powe to fall fom 110 pecent of te aveage powe pice to 50-80 pecent as wind penetation inceases fom zeo to 30 pecent of total electicity consumption. Fo sola powe, similaly low values levels ae eaced aleady at 15 pecent penetation. Hence, competitive lage-scale enewables deployment will be moe difficult to accomplis tan many anticipate. Te vaiability of sola and wind powe affects tei maket value. Te maket value of vaiable enewables falls wit ige penetation ates. We quantify te eduction wit maket data, numeical modeling, and a lit eview. At 30% penetation, wind powe is wot only 50-80% of a constant powe souce. Keywods vaiable enewables; wind powe; sola powe; powe system modeling; maket integation of enewables; electicity makets; intemittency; competitiveness of enewables; cost-benefit analysis. JEL C61, C63, Q42, D40 Te findings, intepetations, and conclusions expessed eein ae tose of te auto and do not necessaily eflect te views of Vattenfall o te Potsdam-Institute. Lion Hit, Vattenfall GmbH, Causseestaße 23, 10115 Belin, lion.it@vattenfall.com, +49 30 81824032. I would like to tank Falko Uecked Álvao López-Peña Fenández, Reinad Ellwange, Pete Kämpfe, Wolf-Pete Scill, Cistian von Hiscausen, Mats Nilsson, Catin Dascil, Dania Röpke, Eva Scmid, Micael Pale, Sonja Wogin, Albect Bläsi-Bentin, Simon Mülle, Matias Nomand, Inka Ziegenagen, Alyssa Scneebaum, Juliet Mason, Gunna Ludee, Lena Kitzing, Maco Nicolosi, two anonymous efeees, and te paticipants of te Stommaktteffen, DSEM, and YEEES seminas fo valuable comments. Especially I want to tank Falko, Catin, and Simon fo inspiing discussions. Te usual disclaime applies. A pevious vesion of tis pape was pesented at te IAEE 2012 Euope Confeence in Venice.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 2 1. Intoduction Electicity geneation fom enewables as been gowing apidly duing te last yeas, diven by tecnological pogess, economies of scale, and deployment subsidies. Renewables ae one of te majo options to mitigate geenouse gas emissions and ae expected to gow significantly in impotance tougout te coming decades (IPCC 2011, IEA 2012). Accoding to official tagets, te sae of enewables in EU electicity consumption sall eac 35% by 2020 and 60-80% in 2050, up fom 17% in 2008. 2 As ydo powe potentials ae lagely exploited in many egions, and biomass gowt is limited by supply constaints and sustainability concens, muc of te gowt will need to come fom wind and sola powe. Wind and sola ae vaiable 3 enewable enegy souces (VRE) in te sense tat tei output is detemined by weate, in contast to dispatcable geneatos tat adjust output as a eaction to economic incentives. Following Joskow (2011), we define te maket value of VRE as te evenue tat geneatos can ean on makets, witout income fom subsidies. Te maket value of VRE is affected by tee intinsic tecnological popeties: Te supply of VRE is vaiable. Due to stoage constaints and supply and demand vaiability, electicity is a time-eteogeneous good. Tus te value of electicity depends on wen it is poduced. In te case of VRE, te time of geneation is detemined by weate conditions. Vaiability affects te maket value because it detemines wen electicity is geneated. Te output of VRE is uncetain until ealization. Electicity tading takes place, poduction decisions ae made, and powe plants ae committed te day befoe delivey. Foecast eos of VRE geneation need to be balanced at sot notice, wic is costly. Tese costs educe te maket value. Te pimay esouce is bound to cetain locations. Tansmission constaints cause electicity to be a eteogeneous good acoss space. Hence, te value of electicity depends on wee it is geneated. Since good wind sites ae often located fa fom load centes, tis educes te value of wind powe. 4 We use a famewok intoduced in Hit (2012a) and compae te maket income of a VRE geneato to te system base pice. Te system base pice is te time-weigted aveage wolesale electicity pice in a maket. Te effect of vaiability is called pofile costs, te effect of uncetainty balancing costs and te effect of locations gid-elated costs. Te label tese components cost fo simplicity, even toug tey migt well ealize as a discount on te pice and not as costs in a bookkeeping sense. Pofile, balancing, and gid-elated costs ae not maket failues, but epesent te intinsic lowe value of electicity duing times of ig supply, at emote sites, and te economic costs of uncetainty. 2 National tagets fo 2020 ae fomulated in te National Renewable Enegy Action Plans. Beuskens et al. (2011), Euelectic (2011a), PointCabon (2011) and ENDS (2010) povide compeensive summaies. EU tagets fo 2050 ave been fomulated in EC (2011). Histoical data ae povided by Euostat (2011). 3 Vaiable enewables ave been also temed intemitten fluctuating, o non-dispatcable. 4 Of couse all types of geneation ae to some extend subject to expected and unexpected outages and ae bound to cetain sites, but VRE geneation is muc moe uncetain, location-specific, and vaiable tan temal geneation. Also, wile weate conditions limit te geneation of wind and sola powe, tey can be always downwad adjusted and ae in tis sense patially dispatcable. Te fout typical popety of VRE tat is sometimes mentioned (Milligan et al. 2009), low vaiable costs, does not impact te value of electicity.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 3 Figue 1. Te system base pice and te maket value of wind powe. Te diffeence between tose two can be decomposed into pofile, balancing, and gid-elated costs. In tis pape, we focus on te impact of vaiability on te maket value of VRE, leaving uncetainty and location fo fute eseac. Te eason fo doing so is tat in a boad liteatue eview we ave identified pofile costs as te lagest cost component and found tis topic unde-eseaced elative to balancing costs (Hit 2012a). Te maket value of VRE will be measued as its elative pice compaed to te base pice. We call tis elative pice value facto 5 and define it moe igoously in section 3. Te value facto is calculated as te atio of te ouly wind-weigted aveage wolesale electicity pice and its time-weigted aveage (base pice). Hence te value facto is a metic fo te valence of electicity wit a cetain time pofile elative to a flat pofile (Stepenson 1973). Te wind value facto compaes te value of actual wind powe wit vaying winds wit its value if winds wee invaiant (Fipp & Wise 2008). In economic tems, it is a elative pice wee te numeaie good is te base pice. A deceasing value facto of wind implies tat wind powe becomes less valuable as a geneation tecnology compaed to a constant souce of electicity. Tee ae two mecanisms toug wic vaiability affects te maket value of enewables in temal 6 powe systems. We label tem coelation effect and meit-ode effect. If a VRE geneation pofile is positively coelated wit demand o ote exogenous paametes tat incease te pice, it eceives a ige pice tan a constant souce of electicity (coelation effect) as long as its capacity emains small. Fo example, wile te 2011 base pice in Gemany was 51 /MW, sola powe eceived an aveage pice of 56 /MW (a value facto of 1.1) on te make because it is typically geneated wen demand is ig. In Euope, tee is a positive coelation effect fo sola due to diunal coelation wit demand, and fo wind because of seasonal coelation. 5 In te Geman liteatue known as Pofilfakto o Wetigkeitsfakto. 6 Temal (capacity-constained) powe systems ae systems wit pedominantly temal geneatos. Tese systems offe limited possibility to stoe enegy. In contas (enegy-constained) ydo systems ave significant amounts of ydo esevois tat allow stoing enegy in te fom of wate.

29 /MW Lion Hit (2013): Te Maket Value of Vaiable Renewables 4 /MW esidual load load 75 17 GW wind 50 25 0 Nuclea Lignite Had Coal CCGT OCGT CHP Figue 2. Meit-ode effect duing a windy ou: VRE in-feed educes te equilibium pice. Numbes ae illustative. Howeve, if installed VRE capacity is non-maginal, VRE supply itself educes te pice duing windy and sunny ous by sifting te esidual load cuve to te left (meit-ode effec Figue 2). Te moe capacity is installed, te lage te pice dop will be. Tis implies tat te maket value of VRE falls wit ige penetation. Te figue also suggests tat te pice dop will be lage if te meit-ode cuve becomes steepe in te elevant egion. Te fundamental eason fo te meit-ode effect is tat te sot-tem supply function is upwad sloping because a) tee exists a set of geneation tecnologies tat diffe in tei vaiable-to-fix costs atio and b) electicity stoage is costly. Moe geneally, it is of couse a well-known economic esult tat te pice of a good deceases as supply is inceased. Pofile costs ave impotant implications fo policy makes, investos, and enegy system modeles alike. In a maket envionmen investos bea pofile costs by eceiving te maket value as income, ence tey play a cucial ole fo investment decisions. Howeve, VRE today ae subsidized in most makets and some suppot scemes esult in pofile costs becoming an extenality. Unde enewable potfolio standads (geen cetificates obligations) o pemium feed-in taiffs (FiTs), ouly pice signals ae passed on to investos. Unde ote policies, suc as fixed FiTs, pofile costs ae commonly paid by electicity consumes o toug govenment funds. 7 Howeve, since te gap between maket evenues and te FiT is filled by subsidies. Tus pofile costs matte fo policy makes, since tei size affects te costs of subsidies. 8 In any case, undestanding te maket value of VRE at ig penetation ates is key evaluating unde wic conditions subsidies can be pased out. Moe fundamentally, unde pefect and complete makets, te maket value is identical to te maginal economic value tat wind powe as fo society. Hence it is te maket value tat sould be used fo welfae, cost-benefi o competitiveness analyses, and not te base pice as in EPIA (2011) and BSW (2011). Ueckedt et al. (2012) popose a metodology ow pofile costs can be taken into account in enegy system models tat lack te ig tempoal esolution needed to captue tem diectly. 76GW 7 Counties tat use a fixed FiT include Gemany, Denmak, and Fance. Cetificate scemes o a pemium FiT ae used fo example in Spain, UK, Sweden, Noway, Poland, and many U.S. states. Gemany intoduced a pemium FiT in 2012; see Sensfuß & Ragwitz (2010) on VRE maket value in te context of tis policy. 8 Te cost fo FiT ae often put diectly on electicity consumes. In Gemany, electicity consumes pay a specific eamaked levy on electicity tat is labelled EEG-Umlage. Balancing costs and location costs ae often coveed by subsidy scemes o socialized via gid taiffs.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 5 Figue 3. Te intesection of long-tem maginal costs (LCOE) and te maket value gives te optimal amount of VRE (Hit 2012b). Tis pape povides a compeensive discussion of te maket value of VRE witin an innovative famewok, based on a tooug eview of pevious publications, new maket data analysis, and tailo-made powe system modeling. Moe specifically, it contibutes to te liteatue in five ways. Fistly, we focus on vaiability and its economic consequence fo te maket value of VRE, pofile costs. We quantify pofile costs based on a liteatue suvey, maket data, and numeical model esults. Secondly, we use elative pices tougout te analysis. Most of te pevious liteatue epots eite absolute pices, total system costs, ote metics suc as $/KW, $/MWa, o $/m², wic ae difficult to compae acoss space, ove time, and between studies. Moe fundamentally, elative pices ave a moe staigtfowad economic intepetation. Tidly, new maket data ae pesented and analyzed econometically, a novelty to tis banc of liteatue. Foutly, we develop and apply a new calibated numeical model: te Euopean Electicity Maket Model EMMA. It models ouly pices as well as investment endogenously, coves a lage geogapical aea, allows fo intenational tade, uses ig quality wind and sola data, and incopoates cucial tecnical constaints of te powe system. Finally, we identify and quantify te impact of pices and policies on te maket value of VRE. By doing so, it is possible to povide a ange of estimates tat takes into account paamete uncetainty, and to identify integation options tat elp mitigate te value dop. Te pape is stuctued as follows. Section 2 eviews te liteatue. Section 3 pesents new maket data and egession analysis. Section 4 outlines an electicity maket model. Section 5 pesents esults. Section 6 summaizes te esults and section 7 concludes. 2. Liteatue eview Tee is extensive liteatue on te effects of VRE on powe makets. A well-known banc of tis liteatue estimates te effect of VRE on te aveage electicity pice (Unge & Algen 2005, Ratmann 2007, Sensfuß 2007, Olsina et al. 2007, Saenz de Miea et al. 2008, Sensfuß et al. 2008, Munksgaad & Motost 2008, MacComack et al. 2010, Jónsson et al. 2010, Woo et al. 2011, O Maoney & Denny 2011, Gil et al. 2012, Hit & Ueckedt 2012). Wile some of tese papes discuss te effect of VRE deployment on income of conventional geneatos, tey do not epot te effect on VRE geneatos income via a cange of tei elative pice. Ote studies discuss specific consequences of VRE, suc as cutailment (Denolm & Magolis 2007, Revuelta et al. 2011, Tuoy & O Malley 2011), demand fo back-up capacity (Weigt 2009, Mount et al. 2011), o dispatc and cycling of temal plants (Ummels 2007, Maddaloni et al. 2009, Göansson & Jonsson 2012). Altoug tese ae te undelying

Lion Hit (2013): Te Maket Value of Vaiable Renewables 6 easons fo integation costs, tis liteatue does not tanslate tecnical constaints into pice effects. A numbe of integation studies quantifies economic costs of VRE vaiability, but tese publications focus on balancing o gid-elated costs wile not accounting fo pofile costs, and seldom epot te pice impact (Goss et al. 2006, Smit et al. 2007, DeCesao & Pote 2009, Milligan & Kiby 2009, GE Enegy 2010, Holttinen et al. 2011). Balancing makets ae discussed in Hit & Ziegenagen (2013). Tis emainde of tis section will discuss te metodologies and findings of te teoetical and empiical liteatue tat focuses moe naowly on te maket value of VRE (Table 1). Table 1: Liteatue on te maket value of VRE Main Refeences Main findings Teoetical Liteatue Gubb (1991), Lamont (2008), Twomey & Neuoff (2008), Joskow (2011) compaisons of geneating tecnologies ae incomplete wen confined to costs (LCOE) maket test maket powe of conventional geneatos deceases te elative value of VRE Empiical Liteatue Lamont (2008), Nicolosi (2012), Mills & Wise (2012) value facto of VRE dops wit inceased penetation (Table 2) At ig penetation (>15% wind): ydo systems ave ige VRE value factos tan temal systems models witout ig tempoal esolution oveestimate te value of VRE models witout endogenous investment undeestimate te value of VRE 2.1 Teoetical and maket powe liteatue Joskow (2011) and Boenstein (2012) discuss te economics of vaiability. Tey conclude tat aveage full costs of diffeent geneation tecnologies, sometimes called te levelized costs of electicity (LCOE), ae an incomplete metic to compae dispatcable and non-dispatcable tecnologies, because te value of electicity depends on te point in time and space it is poduced. 9 Bode (2006), Lamont (2008) and Twomey & Neuoff (2010) deive analytical expessions fo te maket value of VRE. Wile Lamont uses a geneal functional fom fo te meit-ode cuve, Bode assumes it to be linea and Twomey & Neuoff to be quadatic. Lamont sows tat te maket value of VRE can be expessed as te base pice and an additive tem tat is a function of te covaiance of VRE geneation and powe pices. It is impotant to note tat te covaiance is not a static paamete, but a function of wind powe penetation. Oveall, te main contibution of te teoetical liteatue as been to stess te fundamental economic diffeences between dispatcable and VRE tecnology. Twomey & Neuoff (2010), Geen & Vasilakos (2010), and Siosansi (2011) analyze VRE maket value in te context of maket powe of conventional geneatos, applying Counot o supply function equilibium teoy. In times of little VRE supply, stategic geneatos can execise maket powe moe effectively, implying tat mak-ups on competitive pices ae invesely coelated wit VRE in-feed. Tus maket powe tends to educe te value facto of VRE. Twomey & Neuoff (2010) epot tat in a duopoly of conventional geneatos tat engage in optimal fowad contacting, te wind value facto is 0.7, as compaed to 0.9 in a competitive setting. 9 One migt add tat LCOE ae also inappopiate to compae dispatcable tecnologies tat ave diffeent vaiable cost and ae tus dispatced diffeently.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 7 2.2 Empiical liteatue Tee is a long tadition of quantifying maket effects of VRE, emeging in te 1980s. Tis empiical liteatue is quite eteogeneous wit espect to metodology and focus. Some studies ave a vey boad scope and epot pofile costs as one of many esults, wile ote focus on VRE maket value. Results ae epoted in a vaiety of units and often in absolute tems. Futemoe, te liteatue is scatteed in economic and engineeing jounals, wit vey little coss-efeencing, and few papes povide a tooug liteatue eview. In tis subsection, we aim to give an oveview of te liteatue, and extact quantifications of value factos fom pevious studies. Teefoe, value factos wee calculated fom epoted data weneve possible. Studies ae clusteed accoding to te appoac tey use to estimate electicity pices: istoical maket pices, sadow pices fom sot-tem dispatc models, o sadow pices fom long-tem models tat combine dispatc wit endogenous investment. Histoical Pices To deive value factos fom istoical data, it is sufficient to collect ouly electicity pices and synconous VRE in-feed, as done in section 3. Te dawback of tis appoac is tat esults ae limited to te istoical maket conditions, especially istoical penetation ates. Boenstein (2008) estimates te sola value facto in Califonia to be 1.0 1.2, using 2000-03 pices and a syntetic geneation pofile. Sensfuß (2007) and Sensfuß & Ragwitz (2011) estimate te wind value facto in Gemany to dop fom 1.02 to 0.96 between 2001 and 2006, wen te wind sae gew fom 2% to 6% and te sola value facto to fall fom 1.3 to 1.1 between 2006 and 2009. Geen & Vasilakos (2012) calculate value factos on a montly basis, instead of an yealy one. Tey estimate te wind value facto to be 0.92 in West Denmak and 0.96 in East Denmak duing te last decade. Tey also calculate te costs of conveting Danis wind geneation into a constant supply of electicity by means of impots and expots to Noway to be 3-4% of its maket value. Fipp & Wise (2008) estimate te value of wind at diffeent sites in te Westen US. Because te coelation effect vaies between sites, value factos diffe between 0.9 and 1.05. Some studies use locational electicity pices to estimate gid-elated costs. Bown & Rowlands (2009) estimate te sola value facto in Ontaio to be 1.2 on aveage, but 1.6 in lage cities. Lewis (2010) estimates te value facto to vay between 0.89 and 1.14 at diffeent locations in Micigan. Sadow Pices fom (Sot-Tem) Dispatc Models To deive value factos unde conditions ote tan tose wic ave been istoically obseved, electicity pices can be deived fom dispatc models. Howeve, since by definition te capacity mix emains constan pue dispatc modeling does not account fo canges in te capital stock tiggeed by ige VRE penetation. Tus, istoical maket data and dispatc models can only delive estimates of te sot-tem maket value of VRE. Te models applied in te liteatue vay stakly in tems of sopistication and tempoal esolution. Moe tan 20 yeas ago, Gubb (1991a, 1991b) used analytical appoximations and UK data to estimate te maket value of wind powe to be between 0.75 0.85 at 30% penetation ate. Raman & Bouzguenda (1994), based on Bouzuenda & Raman (1993) and Raman (1990), estimated te value of sola enegy to be aound 90-100 $/MW at low penetation ates. Tey epot te value to dop damatically wen sola capacity inceases beyond 15% of installed capacity. Hist & Hild (2004) model a small powe system wit a sot-tem unit commitment model and epot te value facto to dop fom 0.9 to 0.3 as wind powe inceases fom zeo to 60% of installed capacity. ISET et al. (2008) and

Lion Hit (2013): Te Maket Value of Vaiable Renewables 8 Baun et al. (2008) use a simple tee-tecnology model to estimate te value of sola powe in Gemany, but epot only absolute pices. Obesteine et al. (2009) estimate wind value factos fo Austia. Assuming a polynomial meit-ode cuve tey estimate te value facto to be 0.4 0.9 at 30% maket sae, depending on te ode of te polynomial. Obesteine & Saguan (2010) use a cost-based meitode cuve and epot te wind value facto to dop fom 1.02 to 0.97 as te maket sae in Euope gows fom zeo to 6%. Geen & Vasilakos (2011) epot a low UK wind value factos of 0.45 at 30GW installed capacity. Enegy Bainpool (2011) foecast maket values fo ydo, onsoe and offsoe wind, and sola powe in Gemany until 2016, finding a dop of te onsoe value facto to 0.84 wile te offsoe facto emains moe stable at 0.97 due to its flatte geneation pofile. Valenzuela & Wang (2011) sow ow cucial tempoal esolution affects te esults: inceasing te numbe of time steps fom 16 to 16,000 educes te wind value facto fom 1.4 to 1.05, a bias tat is confimed by Nicolosi et al. (2011) and Nicolosi (2012). Sadow Pices fom (Long-Tem) Dispatc and Investment Models Intoducing significant amounts of wind and sola powe to te maket altes te stuctue of electicity pices and incentives investos to eact by building o decommission powe plants. To take into account investo esponse to VRE and to deive long-tem value factos one needs to model investment endogenously. Matin & Diesendof (1983), estimating te absolute maket value of wind powe in te UK, find tat te value of wind powe deceases by a quate as installed capacity in te UK inceases fom 0.5 GW to 8 GW. Tey do not epot te base pice, ence value factos cannot be deived. Lamont (2008) uses Califonian geneation and load pofiles, epoting te wind value factos to dop fom 0.86 to 0.75 as its maket sae inceases fom zeo to 16%, and sola value factos to dop fom 1.2 to 0.9 as its sae ises to 9%. Busnell (2010) finds tat wind evenues ae educed by 4-15% as te wind sae inceases fom zeo to 28% in te Westen US, but doesn t povide value factos. Gowisankaan et al. (2011) compae te evenues of sola powe in Aizona to LCOE of a gas plan wic is a poxy fo te longtem equilibium base pice. As te sola maket sae gows fom 10% to 30%, te value facto dops fom 0.9 to 0.7. Tese fou models ae long-tem in te sense tat all investment is endogenous. Ote studies combine endogenous investment wit an existing plant stack, an appoac tat we will label mid-tem in section 4.3. Swide & Webe (2006) apply a stocastic dispatc and investment model to Gemany and epot te wind value facto to dop fom 0.9 to 0.8 as penetation inceases fom 5% to 25%. Kopp et al. (2012) model wind value factos of 0.7 0.8 at 39% penetation. Nicolosi (2012) uses a sopisticated model of te Euopean electicity maket to estimates bot te wind and te sola value factos in Gemany. He epots tem to dop fom ougly unity to 0.7 as installed capacities incease to 35% and 9% maket sae, espectively. Nicolosi finds a compaable dop wen using data fom Texas. Mills & Wise (2012) apply a similaly elaboated mid-tem model to Califonia, finding compaable esults: te wind value facto dops to 0.7 at 40% penetation. Since electicity demand fo cooling is bette coelated wit sola geneation, te sola value facto is ige in Califonia tan in Gemany but it also dops damatically wit inceased sola saes, despite te flexible ydo capacity available in Califonia dampens te dop of value factos somewat. Mills & Wise also model concentated sola powe and find tat at ig penetation ates, temal enegy stoage inceases its value significantly. Because of tei sopisticated and well-documented models, te studies by Nicolosi and Mills & Wise will seve as point of efeence fo te model esults pesented in section 5. All esults ae summaized in Table 2, Figue 4, and Figue 5. Table 2: Empiical liteatue on te maket value of VRE Pices Refeence Tecnology Region Value Factos Estimates (at diffeent maket saes)

Lion Hit (2013): Te Maket Value of Vaiable Renewables 9 Histoical Pices Pices fom Dispatc Model Dispatc & Investment Model Boenstein (2008) Sola Califonia 1.0 1.2 at diffeent maket design (small) Sensfuß (2007), Sensfuß & Ragwitz (2011) Wind Sola Gemany 1.02 and 0.96 (2% and 6%) 1.33 and 1.14 (0% and 2%) Fipp & Wise (2008) Wind WECC 0.9 1.05 at diffeent sites (small) Bown & Rowlands (2008) Sola Ontaio 1.2 based on system pice (small) Lewis (2010) Wind Micigan 0.89 1.14 at diffeent nodes (small) Geen & Vasilakos (2012) Wind Denmak only montly value factos epoted Gubb (1991a) Wind England 0.75-0.85 (30%) and 0.4-0.7 (40%) Raman & Bouzguenda (1994) Raman (1990), Bouzguenda & Raman (1993) Sola Utility only absolute value epoted Hist & Hild (2004) Wind Utility 0.9 0.3 (0% and 60% capacity/peak load) ISET et al. (2008), Baun et al. (2008) Sola Gemany only absolute value epoted Obesteine & Saguan (2010) Obesteine et al. (2009) Boccad (2010) Wind Euope 1.02 and 0.97 (0% and 6%) Wind Gemany Spain Denmak.87.90 (6-7%).82.90 (7-12%).65.75 (12-20%) Geen & Vasilakos (2011) Wind UK 0.45 (20%) Enegy Bainpool (2011) Onsoe Offsoe Hydo Sola Gemany 0.84 (12%) 0.97 (2%) 1.00 (4%) 1.05 (6%) Valenzuela & Wang (2011) Wind PJM 1.05 (5%) Matin & Diesendof (1983) Wind England only absolute value epoted Swide & Webe (2006) Wind Gemany 0.93 and 0.8 (5% and 25%) Lamont (2008) Wind Sola Califonia 0.86 and 0.75 (0% and 16%) 1.2 and 0.9 (0% and 9%) Busnell (2010) Wind WECC no pices epoted Gowisankaan et al. (2011) Sola Aizona 0.9 and 0.7 (10% and 30%) Mills & Wise (2012) Mills (2011) Nicolosi (2012) Wind Sola Wind Sola Wind Califonia Gemany Gemany ERCOT 1.0 and 0.7 (0% and 40%) 1.3 and 0.4 (0% and 30%) 0.98 and 0.70 (9% and 35%) 1.02 and 0.68 (0% and 9%).74 (25%) Kopp et al. (2012) Wind Gemany 0.93 (19%) and 0.7-0.8 (39%) Tese publications usually do not use tems pofile cost o utilization effect. Output was e-calculated to deive yealy value factos.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 10 Figue 4. Wind value factos as epoted in te liteatue. Figue 5. Sola value factos as epoted in te liteatue. Summing up te liteatue eview, at low penetation ates, wind value factos ae epoted to be close to unity and sola value factos ae somewat ige. Wind value factos ae estimated to dop to aound 0.7 at 30% maket sae. Sola value factos ae epoted to dop faste, so tey eac 0.7 at 10-15% penetation ate, albeit tee is lage vaiation bot in wind and sola value factos. Te liteatue some metodological conclusions as well: to estimate value factos at ig maket saes, moe ecent studies ely on endogenous investment modeling wile taking te existing capital stock into account. Keeping te capacity mix constant would downwad-bias te VRE value facto. Seveal papes empasize te impotance of ig tempoal esolutions and epot tat low-esolution models oveestimate te value of VRE. Only few of te models featues esevoi ydo powe (Raman & Bouzguenda 1994, Mills & Wise 2012, Nicolosi 2012), and tose teat ydo powe in a elatively stylized way. Tis can be seen as a seious sotcoming of te liteatue, since ydo povides a potentially impotant souce of flexibility. It migt be wotwile to note tat tee is a stong metodological focus on numeical modeling, wile ote empiical metods suc as egession analysis ae not used. Finally, only alf of te eviewed studies ae publised in pee-eviewed jounals. 3. Maket Data In tis section, istoical VRE value factos ae calculated ex-post fom obseved VRE in-feed data and maket pices. In contast to most pevious studies (Boenstein 2008, Sensfuß 2007, Fipp & Wise 2008, Bown & Rowlands 2008), actual instead of estimated VRE geneation data ae used, and esults ae povided fo a numbe of diffeent makets. Tese value factos ae ten used to estimate te impact of penetation on maket value econometically, a novelty in tis banc of te liteatue. 3.1 A Fomal Definition of Value Factos To stat wit, value factos ae fomally defined. Te base pice p is te time-weigted aveage wolesale day-aead pice. In matix notation, p' t t't p (1)

Lion Hit (2013): Te Maket Value of Vaiable Renewables 11 wee p Tx1 is a vecto of ouly spot pices and t Tx1 a vecto of ones, bot wit dimensionality w p is te wind- wee T is te numbe of ous. Te aveage evenue of wind powe o wind pice weigted spot pice, wee te geneation pofile g Tx1 w p p' g g't Tx1 is a vecto of ouly geneation factos tat sum up to te yealy full load ous (FLH). Accodingly, p' g is te yealy evenue and g' t te yealy geneation. 10 Te wind value facto w v is defined as te atio of aveage wind evenues to te base pice: v w Tis definition elies on day-aead pices only and ignoes ote maket cannels suc as futue and intaday makets (discussed in Obesteine & von Bemen 2009). Te sola value facto is defined analogously. Hee, value factos ae calculated fo eac yea, wile otes ave used diffeent peiods (Geen & Vasilakos 2012, Valenzuela & Wang 2011). Using longe peiods tends to lowe te value facto if VRE geneation and demand ae not coelated ove tese time scales. p w p (2) (3) 3.2 Desciptive Statistics In te following, wind and sola value factos ae calculated fo Gemany and wind value factos fo a numbe of counties. Day-aead spot pices wee taken fom vaious powe excanges. Geneation pofiles wee calculated as ouly in-feed ove installed capacity. In-feed data come fom tansmission system opeatos (TSOs) and capacity data fom TSOs as well as public and industy statistics. Installed wind capacity is usually epoted on a yealy basis and was intepolated to account fo canges duing te yea. Because sola capacity as canged apidly, daily capacity data was used. Fo ealie yeas, Geman in-feed data wee not available, consequently poxies wee used. 11 Te maket sae of wind m w is wind powe geneation ove total electicity consumption. Table 3 epots desciptive statistics fo Gemany. At low penetation ates, te wind value facto was sligtly above unity and te sola facto aound 1.3. Tis can be explained by te positive coelation of VRE wit demand (coelation effect): sola powe coelates positively wit electicity demand on a diunal scale and wind powe on a seasonal scale. As wind s maket sae ose fom 2% to 8% fom 2001-12, its value facto declined by 13 pecentage points. Similaly, an incease of te sola maket sae fom zeo to 4.5% led to a decline of its value facto by 28 pecentage points. Tese dops ae pimaily caused by te meit-ode effect (see also Figue 6). Histoical maket data indicates tat te meit-ode effect significantly educed te maket value of VRE, even at modest maket saes in te single digit ange. Table 3: Base pice, aveage evenue, maket value, and maket sae fo wind and sola powe in Gemany. 10 Tis nomenclatue can be easily genealized fo pice peiods of unequal lengty (by canging te ones in t to non-unifom tempoal weigts) and, moe impotantly, to account fo spatial pice and wind vaiability and gid-elated costs (see Appendix A). 11 Pice data wee obtained fom te electicity excanges EPEX-Spo Nodpool, and APX. In-feed data come fom te TSOs Statnet Svenska Kaftnä Enegienet.dk, 50 Hetz, Ampion, TenneT, EnWG, and Elia. Installed capacities wee taken fom BMU (2011), BNetzA Stammdatenbank (2012), Wold Wind Enegy Association (2011), and Euopean Wind Enegy Association (2011). All data ae available as supplementay mateial to te online vesion of tis aticle. Geman sola data fo 2008-10 ae poxied wit 50Hetz contol aea data. Geneation in Gemany coelates vey well wit geneation in te 50Hetz aea (ρ = 0.93), so te poxy seems appopiate. Wind pofiles fom 2001-06 ae taken fom Sensfuß (2007) and Sola pofiles 2006-07 fom Sensfuß & Ragwitz (2011).

Lion Hit (2013): Te Maket Value of Vaiable Renewables 12 Wind Sola p ( /MW) w p ( /MW) w v (1) w m (%) s p ( /MW) 2001 24 25* 1.02 2.0 - - 0.0 2004 29 29* 1.00 3.0 - - 0.1 2005 46 46*.99 3.5 - - 0.2 2006 51 49*.96 4.7 68** 1.33 0.4 2007 38 33.88 4.9 44** 1.16 0.5 2008 66 60.92 5.5 82*** 1.25 0.7 2009 39 36.93 7.1 44*** 1.14 1.1 2010 44 42.96 7.3 49*** 1.11 2.1 2011 51 48.93 8.8 56 1.10 3.3 2012 43 38.89 8.0 45 1.05 4.5 Aveage 43 40 0.94 5.6 55 1.16 1.8 * Estimates fom Sensfuß (2007) ** Estimates fom Sensfuß & Ragwitz (2011) *** Maket data fo 50Hetz contol aea. Maket fo Gemany data otewise. s v (1) s m (%) Figue 6. Histoical wind and sola value factos in Gemany (as epoted numeically in Table 3). Figue 7. Te daily pice stuctue in Gemany duing summes fom 2006 2012. Te bas display te distibution of sola geneation ove te day. An altenative way of visualizing te impact of sola geneation on elative pices is to display te daily pice stuctue (Figue 7). As 30 GW sola PV capacity was installed ove te yeas, pices between 8 a.m. and 6 p.m. fell elative to te pices at nigt. Wile te pice at noon used to be 80% ige tan te aveage pice, today it is only about 15% ige. Table 4 sows wind value factos fo diffeent Euopean counties. Value factos ae close to unity in te Nodic counties, wee lage amounts of flexible ydo geneation povide intetempoal flexibility and educe sot-tem pice fluctuations. In temal powe systems, suc as in Gemany, VRE value factos ae moe sensitive to penetation ates. Te stong inteconnections between Denmak and te Nodic counties keep te Danis value factos fom dopping fute.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 13 Table 4: Wind value factos in diffeent counties Gemany Denmak- West Denmak- East Sweden 2007 0.88 0.88 0.92 1.03-2008 0.90 0.90 0.93 0.97 - Noway 2009 0.91 0.96 1.00 1.01 0.99 2010 0.94 0.96 0.99 1.01 1.03 2011 0.92 0.94 0.93 n/a n/a 2012 0.89 0.90 0.90 n/a n/a Aveage 0.91 0.92 0.95 1.01 1.01 3.3 Econometics A simple egession model is applied to estimate te impact of inceasing penetation ates on value factos. Based on te teoetical aguments fom section 1, we ypotesize tat ige maket saes educes te value facto, and tat te dop is moe ponounced in temal systems. Te egession model includes te maket sae of wind powe, a dummy fo temal system tat inteacts wit te sae (suc tat te impact of maket sae in temal systems is β 1 and in temal system β 1+ β 2 ), and time dummies as contol vaiables to captue supply and demand socks: w v c 0 1 saet, c 2 saet, c temal c 3 temal c (4) ~ iid (0, ²) wee and ae indices fo time and counties, espectively. Te model is specified as a andom effects model and estimated using OLS. Te model fomulation is equivalent to estimating temal and ydo systems sepaately. c Te esults, wic ae summaized in table 5, ae stiking: inceasing te maket sae of wind by one pecentage point is estimated to educe te value facto by 0.22 pecentage points in ydo systems (β 1 ) and by 1.62 pecentage points in temal systems (β 1 +β 2 ). Te wind value facto witout any installed wind capacity is estimated to be 0.98 in ydo systems (β 0 ) and 1.04 in temal systems (β 0 +β 4 ). All coefficients ae significant at te 5%-level. Table 5: Regession esults Dependent vaiable Wind value facto (%) Sae of wind powe (% of consumption) Sae of wind powe * Temal dummy Constant Temal dummy -0.26** (3.5) -1.36** (3.2) 98.3*** (82.5) 0.06** (2.1) R².51 Numbe of obs 30

Lion Hit (2013): Te Maket Value of Vaiable Renewables 14 *** significant at 1% level; ** significant at 5% level; absolute t-values in backets Howeve, tee ae seveal easons to suspect biased estimates and to teat esults cautiously. Te numbe of obsevations is vey mall. Penetation ates ae small compaed to expected long-tem levels and it is not clea tat esults can be extapolated. Futemoe, powe systems migt adapt to inceasing penetation ates. Finally, in te pas expoting electicity duing windy times as elped Geman and Danis value factos to stabilize. In te futue, wen simila amounts of VRE ae installed in suounding makets, tee will be muc less potential to benefit fom tade and value factos migt dop moe. 4. Numeical Modeling Metodology Tis section intoduces te Euopean Electicity Maket Model EMMA, a stylized numeical dispatc and investment model of te inteconnected Notwesten Euopean powe system. In economic tems, it is a patial equilibium model of te wolesale electicity maket. EMMA as been developed specifically to estimate value factos at vaious penetation ates, unde diffeent pices and policies, and in te medium-tem as well as te long-tem equilibium. Model development followed te pilosopy of keeping fomulations pasimonious wile epesenting VRE vaiability, powe system inflexibilities, and flexibility options wit appopiate detail. Tis section discusses cucial featues vebally. All equations and input data can be found in te Appendix B. Model code and input data ae available fo download as supplementay mateial to te online vesion of tis aticle. 4.1 Te electicity maket model EMMA EMMA minimizes total costs wit espect to investmen poduction and tade decisions unde a lage set of tecnical constaints. Makets ae assumed to be pefect and complete, suc tat te social planne solution is identical to te maket equilibium. Hence, te maket value epesents bot te maginal benefit to society as well as te income tat an investo eans on te maket. Te model is linea, deteministic, and solved in ouly time steps fo one yea. Fo a given electicity demand, EMMA minimizes total system cos te sum of capital costs, fuel and CO 2 costs, and ote fixed and vaiable costs, fo geneation, tansmission, and stoage. Capacities and geneation ae optimized jointly. Decision vaiables compise te ouly poduction of eac geneation tecnology including stoage, ouly electicity tade between egions, and investment and disinvestment in eac tecnology. Te impotant constaints elate to electicity demand, capacity limitations, and te povision of distict eat and ancillay sevices. Geneation is modeled as eleven discete tecnologies wit continuous capacity: two VRE wit zeo maginal costs wind and sola, six temal tecnologies wit economic dispatc nuclea, lignite, ad coal, combined cycle gas tubines (CCGT), open cycle gas tubines (OCGT), and lignite cabon captue and stoage (CCS), a geneic load sedding tecnology, and pumped ydo stoage. Houly VRE geneation is limited by geneation pofiles. Dispatcable plants poduce weneve te pice is above tei vaiable costs. Stoage is optimized endogenously unde tubine, pumping, and inventoy constaints. Existing powe plants ae teated as sunk investmen but ae decommissioned if tey do not cove tei quasi-fixed costs. New investments ave to ecove tei annualized capital costs fom sot-tem pofits. Te ouly electicity pice is te sadow pice of demand. In ote wods, we model an enegy-only maket wit scacity picing, assuming pefect and complete makets. Tis guaantees tat in te long-

Lion Hit (2013): Te Maket Value of Vaiable Renewables 15 tem equilibium, te zeo-pofit condition olds. Cutailment of VRE is possible at zeo costs, wic implies tat te electicity pice cannot become negative. Demand is exogenous and assumed to be pefectly pice inelastic at all but vey ig pices, wen load is sed. Pice-inelasticity is a standad assumption in dispatc models due to tei sot time scales. Wile investment decisions take place ove longe time scales, we justify tis assumption wit te fact tat te aveage electicity pice does not vay damatically between model scenaios. Combined eat and powe (CHP) geneation is modeled as must-un geneation. A cetain sae of te cogeneating tecnologies lignite, ad coal, CCGT and OCGT ae foced to un even if pices ae below tei vaiable costs. Te emaining capacity of tese tecnologies can be feely optimized. Investment and disinvestment in CHP geneation is possible, but te total amount of CHP capacity is fixed. Ancillay sevice povision is modeled as a must-un constaint fo dispatcable geneatos. Coss-bode tade is endogenous and limited by net tansfe capacities (NTCs). Investments in inteconnecto capacity ae endogenous to te model. As a diect consequence of ou pice modeling, inteconnecto investments ae pofitable if and only if tey ae socially beneficial. Witin egions tansmission capacity is assumed to be non-binding. Te model is linea and does not featue intege constaints. Tus, it is not a unit commitment model and cannot explicitly model stat-up cost o minimum load. Howeve, stat-up costs ae paameteized to acieve a ealistic dispatc beavio: assigned base load plants bid an electicity pice below tei vaiable costs in ode to avoid amping and stat-ups. Being igly stylized, te mode as impotant limitations. Te most significant caveat migt be te absence of ydo esevoi modeling. Hydo powe offes intetempoal flexibility and can eadily attenuate VRE fluctuations. Similaly, demand esponse in te fom of demand sifting o an elastic demand function would elp to integate VRE geneation. Tecnological cange is not modeled, suc tat geneation tecnologies do not adapt to VRE vaiability. Ignoing tese flexibility esouces leads to a downwad-bias of VRE maket values, tus esults sould be seen as consevative estimates. EMMA is calibated to Notwesten Euope and coves Gemany, Belgium, Poland, Te Netelands, and Fance. In a back-testing execise, model output was compaed to istoical maket data fom 2008-10. Cucial featues of te powe maket can be eplicated faily well, like pice level, pice speads, inteconnecto flows, peak / off-peak speads, te capacity and geneation mix. Wind value factos ae eplicated sufficiently well (Table 6). Sola value factos ae somewat below maket levels, pobably because of te limited numbe of geneation tecnologies. Table 6: Value factos in Gemany Wind Sola model maket model maket 2008 0.93 0.92 1.04 1.25 2009 0.95 0.93 1.03 1.14 2010 0.94 0.96 0.98 1.11 4.2 Input Data Electicity demand, eat demand, and wind and sola pofiles ae specified fo eac ou and egion. Histoical data fom te same yea (2010) ae used fo tese time seies to peseve empiical tempoal

Lion Hit (2013): Te Maket Value of Vaiable Renewables 16 and spatial coelation of and between paamete as well as ote statistical popeties. Tese coelations cucially detemine te maket value of enewables. Unlike in section 3, VRE pofiles ae not based on istoical in-feed, wic is not available fo all counties. Instead, istoical weate data fom te eanalysis model ERA-Inteim and aggegate powe cuves ae used to deive pofiles. Details on tis pocedue and te statistical popeties of VRE ae discussed in Hit & Mülle (2013). Wind load factos in all counties ae scaled to 2000 full load ous. Load data wee taken fom vaious TSOs. Heat pofiles ae based on ambient tempeatue. Fixed and vaiable geneation costs ae based on IEA & NEA (2010), VGB Powetec (2011), Black & Veatc (2012), and Nicolosi (2012). Fuel pices ae aveage 2011 maket pices and te CO 2 pice is 20 /t. Summe 2010 NTC values fom ENTSO-E wee used to limit tansmission constaints. CHP capacity and geneation is fom Euelectic (2011b). A discount ate of 7% is used fo all investments, including tansmission, stoage and VRE. 4.3 Long-tem vs. Sot-tem Maket value Te maket value of VRE depends cucially on assumptions egading te peviously-existing capital stock. In te following, we discuss tee altenatives tat ae found in te liteatue. One option is to take te existing geneation and tansmission infastuctue as given and disegad any canges to tat. Te optimization educes to a sole dispatc poblem. We label tis te sot-tem pespective. Anote possibility is to disegad any existing infastuctue and optimize te electicity system fom scatc as if all capacity was geen-field investment. Tis is te long-tem pespective. Finally, one can take te existing infastuctue as given, but allow fo endogenous investments and disinvestments. We call tis te medium tem. A vaiant of te mid-tem famewok is to account only fo a sae of existing capacity, fo example, only tose plants tat ave not eaced tei tecnical life-time (tansition). In section 5 we pesent mid-tem and long-tem esults. Fo te so mid, and long-tem famewok coesponding welfae optima exists, wic ae, if makets ae pefec identical to te coesponding maket equilibia. It is only in te long-tem equilibium tat all pofits ae zeo (Steine 1957, Boiteux 1960, Cew et al. 1995, Hit & Ueckedt 2012). Note tat te expessions sot tem and long tem ae not used to distinguis te time scale on wic dispatc and investment decisions take place, but efe to te way te capital stock is teated. Unde pefect and complete makets and inelastic demand, te maket value of VRE equals maginal cost savings in te powe system. Unde a sot-tem paadigm, adding VRE capacity educes vaiable costs by eplacing temal geneation Gubb (1991a) calls te sot-tem maket value maginal fuel-saving value. In a long-tem famewok, VRE additionally educes fixed costs by avoiding investments. In a mid-tem setup, VRE educes only quasi-fixed costs if plants ae decommissioned, but cannot educe te capital costs of (sunk) capital. Typically te long-tem value of VRE is ige tan te mid-tem value. Table 7: Analytical famewoks Sot tem (Static) Medium tem / Tansition Long tem (Geen Field) Existing Capacity included included / patially included not included (Dis)investment none endogenous / exogenous - VRE cost savings vaiable costs (fuel, vaiable O&M, CO2) vaiable costs vaiable and fixed costs

Lion Hit (2013): Te Maket Value of Vaiable Renewables 17 quasi-fixed costs (if incumbent plants ae decommissioned) fixed costs (if new plants ae avoided) Long-tem pofits positive o negative zeo o negative fo incumbent capacity zeo fo new capacity Refeences (examples) studies based pue dispatc models (Table 2) Swide & Webe (2006), Rosen et al. (2007), Neuoff et al. (2008), Sot et al. (2011), Halle et al. (2011), Mills & Wise (2012), Nicolosi (2012) Quasi-fixed costs ae fixed O&M costs. Fixed costs ae quasi-fixed costs plus investment (capital) costs. zeo Matin & Diesendof (1983), DeCaolis & Keit (2006), Lamont (2008), Busnell (2010), Geen & Vasilakos (2011) 5. Model Results Te model intoduced in te pevious section is now used to estimate VRE maket values at vaious penetation levels. Fo eac given level of VRE, a new equilibium is found in te est of te system. Tis is done bot in a mid-tem and a long-tem famewok. Futemoe, te effects of a numbe of policies, pices, and paametes ae discussed. Of couse all findings sould be intepeted cautiously, keeping model sotcomings and data limitations in mind. Specifically, only te maket saes of VRE ae inceased. A boade enewables mix wit ydo powe and biomass would ave diffeent effects. (Maket) sae is used intecangeably wit penetation (ate) and is measued as geneation ove final consumption. Pices ae calculated as te load-weigted aveage acoss all six counties, unless stated otewise. 5.1 Mid-tem wind maket value At low penetation levels, te wind value facto is 1.1 (Figue 8). In ote wods, te coelation effect inceases te value of wind powe by ten pecent. Howeve, wit ige maket sae, te value facto dops significantly, eacing 0.5 at 30% penetation. In ote wods, at 30% penetation, electicity fom wind is wot only alf of tat fom a constant souce of electicity. Tis is te meit-ode effect at wok. Te slope of te cuve is vey simila to te estimated coefficient fo temal systems in section 3 (on aveage 1.8 pecentage points value facto dop pe pecentage point maket sae compaed to 1.6). In absolute tems, wind s maket value dops even quicke (Figue 9): te aveage income of wind geneatos falls fom 73 /MW to 18 /MW as base pice dops fom 66 /MW to 35 /MW. To put tis into contex we compae tis to te geneation costs of wind tat sink at a ypotesized leaning ate of five pecent. 12 Model esults indicate tat falling evenues ovecompensate fo falling costs: te gap between costs and evenues emains open, and indeed inceases. Unde tese assumptions, wind powe does not become competitive. 12 We assume tat full costs ae today 70 /MW, te global leaning ate is 5%, and tat global capacity doubles twice as fast as Euopean capacity. Tis implies tat te LCOE would dop to 60 /MW at 30% maket sae.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 18 Looking at te esults fom a diffeent angle, costs would need to dop to 30 /MW to allow 17% maket sae witout subsidies. Fom anote pespective, wit a value facto of 0.5 and LCOE of 60 /MW, te base pice as to eac 120 /MW to make 30% wind competitive. Hee, te maket value fo wind is estimated fo given penetation levels. One can tun te question aound and estimate te cost-optimal (o maket equilibium) amount of wind powe, wic we do in a elated pape (Hit 2012b). Figue 8. Mid-tem value facto of wind. Figue 9. Mid-tem absolute maket value, compaed to te base pice and indicative LCOE unde leaning. Figue 10 displays te capacity mix wit inceasing wind saes. At 30%, equivalent to 200 GW of wind powe, total dispatcable capacity educes only by 40 GW. Wile te pofitability of peak load plants inceases and te pofitability of base load tecnologies is educed, te sifts ae too small to tigge new investments. Remakably, tee is no investment in stoage, and inteconnecto investments ae modeate (about 50% ige capacity tan today, of wic two tids can be attibuted to wind powe). Te value dop can be explained by te sift in pice-setting tecnologies. Figue 11 sows te sae of ous of te yea in wic eac geneation tecnology sets te electicity pice by being te maginal geneato. Te sae of low-vaiable cost dispatcable tecnologies suc as lignite and nuclea inceases wit ige wind deploymen te eason being tat esidual load is often educed enoug to make tese tecnologies pice setting. At 30% wind maket sae te pice dops to zeo duing 1000 ous of te yea, wen must-un geneation becomes pice-setting. Because tese ae pecisely te ous wen muc wind powe is geneated, 28% of all wind powe is sold at a pice of zeo.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 19 Figue 10. Capacity development fo given wind capacity. One eason fo te dop in value is tat wind powe is less and less capable of eplacing dispatcable capacity. Figue 11. Pice-setting tecnology as a sae of all ous (bas) and te sae of wind enegy tat is sold at zeo pice (diamonds). Te value factos fo individual counties ae simila to te egional value, wit one exception (Figue 12). Fance as a lage fleet of nuclea powe plants. Wen adding wind powe to te system, te pice dops quickly to te low vaiable costs of nuclea duing wind ous. As a consequence, te value facto dops quicke tan te ote makets. Model esults ae obust to te coice of te wind yea (Figue 13). Figue 12. Wind value factos in individual counties. Figue 13. Wind pofiles fom diffeent yeas lead to almost exactly te same value factos. 5.2 Mid-tem sola maket value Te ig maket value of sola powe tat is obseved on makets migt suggest tat sola s maket value is moe stable tan wind s. Model esults indicate tat tis is not te case. Its value facto actually

Lion Hit (2013): Te Maket Value of Vaiable Renewables 20 dops sligtly below 0.5 aleady at 15% maket sae (Figue 14). Howeve, one must keep in mind tat unlike in te case of wind, te model is not able to eplicate te ig sola value facto tat makets indicate fo low penetations. Even at a leaning ate of 10% sola LCOE emain above maket value. 13 Te steep dop of sola maket value confims pevious studies (Boenstein 2008, Gowisankaan et al. 2011, Nicolosi 2012, Mills & Wise 2012) and consistent wit istoical Geman maket data (ecall Figue 5 and Figue 6). Tis can be explained wit te fundamental caacteistics of sola powe. Te sola pofile is moe peaky tan wind, wit a consideable amount of geneation concentated in few ous. Tis is sown in Figue 15, wic displays te soted ouly distibution of one MW geneated fom wind and sola duing te couse of one yea. In te emainde of tis section we will focus on wind powe. Sola value factos ae available fom te auto upon equest. Figue 14. Mid-tem sola value facto dops below 0.5 at only 15% penetation ate. Figue 15. Geneation duation cuves fo sola and wind powe. Sola geneation is concentated in fewe ous tan wind geneation. 5.3 Renewables Mix If bot wind and sola powe ae intoduced simultaneously, te espective value saes dops less wen calculated as a function of enewables capacity (Figue 16). Howeve, te dop is still consideable. Tis indicates tat notwitstanding wind speeds and sola adiation being negatively coelated, an enegy system wit lage saes of bot VRE tecnologies leads to low value factos fo bot tecnologies. 13 If we assume tat full costs ae today 250 /MW on Euopean aveage, te global leaning ate is 10%, and tat global capacity doubles fou times as fast as Euopean capacity, we will ave full costs of aound 100 /MW at 15% maket sae.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 21 Figue 16: Wind value facto wit and witout sola. 5.4 Long-tem maket value Tis subsection applies a long-tem famewok, witout any peviously existing conventional powe plants. In compaison to te mid-tem, te powe system can adjust moe flexibly to a given amount of VRE. Hige saes of VRE educe te amount of enegy geneated by temal powe plants, witout educing total temal capacity muc (Hit 2012a). Tis educes te aveage utilization of temal plants, wic inceases specific capital costs. Nicolosi (2012) temed tis te utilization effect. In a long-tem famewok tis effects exists, but is weake tan in te mid-tem, because te system is not locked in wit too ig amounts of base load tecnologies. Tus, te long-tem maket value of VRE is usually ige tan its mid-tem value (Figue 17).

Lion Hit (2013): Te Maket Value of Vaiable Renewables 22 Figue 17. System adaptation causes te long-tem maket value to be ige tan te sot-tem value. Te majo facto is a sift of te geneation mix fom base load towads mid and peak load. In te EMMA simulations, te aveage utilization of dispatcable capacity deceases fom about 54% to 39% as te wind penetation ate is inceased to 30%. Te long-tem wind value facto is 0.65 at 30% maket sae, almost 15 pecentage points ige tan te mid-tem facto. At penetation ates below 10%, wind powe does not alte te optimal capacity mix significantly, tus mid-tem and longtem value factos ae identical (Figue 18). Te base pice is also moe stable in te long un tan in te medium un (Figue 19). As fomally sown by Lamont (2008), te long-tem base pice is set by te LCOE of te ceapest base load tecnology as long as tee is one tecnology tat uns base load. At ig penetation, te absolute longtem wind value is about twice as ig as te mid-tem value. Figue 18. At ig penetation ates, Te long-tem value facto is significantly ige tan te mid-tem value facto. Figue 19. Te long-tem wind maket value in absolute tems. Wile te value is twice as ig as te mid-tem value

Lion Hit (2013): Te Maket Value of Vaiable Renewables 23 at ig penetation ates, it is still significantly below full costs. Te capacity mix as a ige sae of peak load capacity in te long-tem equilibium (Figue 20). Te diffeence between maket values is lage in counties wit a ig base load capacity suc as Fance. Howeve, it is impotant to note tat also te long-un maket value dops significantly wit inceasing maket saes. Figue 20. Capacity mix at 30% wind powe. Te long-tem equilibium capacity mix as lage saes of mid- and peak load tecnologies. In te emainde of section 5, te effects of canging pice assumptions and policies on te maket value of wind and sola will be tested. Specifically, CO 2 pices, fuel pices, inteconnecto and stoage capacity, and te flexibility of conventional geneatos will be vaied. Tee ae two easons fo doing tis: on te one and we want to undestand te ange of outcomes due to paamete uncetainty. On te ote and, we use te findings to identify pomising integation options tat elp mitigating te value dop of VRE. Te un wit uncanged paametes is used as a point of efeence o bencmak. 5.5 CO2 picing Cabon picing is one of te most impotant policies in te powe secto, and many obseves suggest tat CO 2 picing as a significantly positive impact on VRE competitiveness: a ige cabon pice inceases te vaiable costs of emitting plants, and ence inceases te aveage electicity pice. Howeve, tee ae two ote cannels toug wic cabon picing affects te value of VRE. A ige pice makes te meit ode cuve flatte in te ange of lignite ad coal CCGT, inceasing te value facto at ig penetation. Finally, a ige CO 2 pice induces investments in low-cabon tecnologies. Te available dispatcable low-cabon tecnologies in EMMA ae nuclea powe and lignite CCS, bot featuing vey low vaiable costs. Tus, tese new investments make te meit-ode cuve steepe. In contas a lowe CO 2 pice educes te electicity pices, makes te meit-ode cuve of emitting plants steepe, and induces investments in lignite, fute inceasing te slope of te meit-ode cuve. Tus te oveall effect of a ige cabon pice on te maket value of VRE is ambiguous a pioi, but a lowe cabon pice sould stictly educe VRE value.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 24 To quantify tese aguments, te bencmak CO 2 pice of 20 /t was canged to zeo and 100 /t. Because mid-tem and long-tem effects ae quite simila, only long-tem esults ae sown. Te cental finding of tis sensitivity is tat bot ige and lowe CO 2 pices educe te absolute maket value of wind powe (Figue 21). At a CO 2 pice of 100 / about alf of all dispatcable capacity is nuclea powe, suc tat te meit-ode effect is so stong tat even absolute evenues of wind geneatos ae educed despite a significant incease in electicity pices. Tis migt be one of te moe supising esults of tis study: tigte cabon pices migt actually educe te income of VRE geneatos, if te adjustment of te capital stock is taken into account. Tis finding eavily depends on new investments in nuclea o CCS. If tose tecnologies ae not available fo new investments fo example due to secuity concens o lack of acceptance te maket value of wind is damatically ige (Figue 22). Te base pice inceases, and te meit-ode becomes so flat tat te pice seldom dops below te vaiable costs of ad coal. Indeed, even at cuent wind cost levels, moe tan 30% of wind powe would be competitive. Howeve, excluding nuclea powe and CCS esults in a damatic incease of cabon emissions: wile a CO 2 pice of 100 /t bings down emissions fom 900 Mt to 200 Mt pe yea, emissions incease to moe tan 500 Mt if nuclea and CCS ae unavailable, even at 30% wind. Hence, excluding nuclea and CCS fom te set of available tecnologies will elp wind powe to become competitive, but it also leads to damatically ige CO 2 emissions. Figue 21. Absolute long-tem wind value at diffeent CO 2 pices. At penetation ates above five pecen a CO 2 pice of 100 /t esults in lowe income fo wind geneatos tan 20 /t. Te aows indicate te cange in income as te CO 2 ises. Figue 22. Absolute long-tem wind value at 100 /CO 2 pices fo diffeent tecnology assumptions. Te aow indicates te effect of excluding nuclea and CCS at 100 /t CO 2. 5.6 Fuel pices Fo te bencmak un, 2011 maket pices ae used fo te globally taded commodities ad coal (12 /MW t) and natual gas (24 /MW t). It is sometimes agued tat ige fuel pices, diven by depleting esouces, will make enewables competitive. In tis section, gas and coal pices wee doubled sepaately and simultaneously. A plausible expectation is tat ige fuel costs, diving up te electicity pice, incease te value of wind powe.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 25 Figue 23. Long-tem wind value factos at vaious fuel pices. Te base pice is vitually identical in all fou uns. Howeve, esults do not confim tis ypotesis. Again, fuel pice canges affect te value of RES toug diffeent cannels. A cange in elative input pices induces substitution of fuels, suc tat te aveage electicity pice emains vitually uncanged. In contas te meit-ode cuve canges significantly. Wit a ige coal pice, it becomes flatte. Wit a ige gas pice, it becomes steepe. If bot pices double, new lignite and nuclea investment lead to it becoming muc steepe. As a esul ige gas pices educe te wind value facto (Figue 23) and educe te absolute value of wind. Tese esults indicate tat it is not necessaily te case tat VRE benefit fom ige fuel pices; indeed tey migt even lose. Mid-tem esults ae simila and not sown. Te seemingly counte-intuitive effects of CO 2 and fuel pices on te value of wind indicate ow impotant it is to take adjustments of te capital stock into account wen doing policy analysis. 5.7 Inteconnecto capacity Hige long-distance tansmission capacity elps to balance fluctuations of VRE geneation. In te bencmak uns, it was assumed tat inteconnectos ave today s capacities. To undestand te effect of tansmission expansion on VRE maket value, NTC constaints wee fist set to zeo to completely sepaate makets, tey wee ten doubled fom cuent levels, and finally taken out to fully integate makets tougout te egion. Te impact of tansmission expansion is damatically diffeent in a long-tem and a mid-tem famewok. Long-tem esults indicate tat long-distance tansmission expansion suppots te maket value of wind in all counties (Figue 24). Howeve, te size of te effect is small: doubling te capacity of all existing inteconnectos meely leads to an incease of wind s value facto by one pecentage point at ig penetation levels.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 26 Figue 24. Long-tem wind value factos in te model egion at diffeent NTC assumptions. Te impact of doubling NTC capacity is modeate in size, but positive in all counties. Mid-tem esults sow ow existing temal capacity inteacts wit socks to te system and ow damatically tis can alte outcomes. Wile moe inteconnecto capacity educes te mid-tem value of wind in Gemany, it inceases it damatically in Fance (Figue 25, Figue 26). Tis esult is explained by te lage existing Fenc nuclea fleet: in Fance, pices ae often set by nuclea powe duing windy ous at ig wind penetation ates. Since Fenc and Geman winds ae igly coelated, duing windy ous Fenc nuclea powe becomes te pice sette in Gemany. Wit moe inteconnecto capacity, tis effect is moe ponounced. Tus long-distance tansmission pevents Fenc wind powe fom being locked in wit low nuclea pices, but its Geman wind powe by impoting Fenc nuclea powe duing windy times. Figue 25. Te Geman mid-tem wind value facto is educed if inteconnecto capacity is inceased (aow). Figue 26. Te Fenc mid-tem wind value inceases stongly wit moe inteconnecto capacity (aow). Tese findings ae consistent wit pevious studies. Obesteine (2012) models te impact of inteconnectos on VRE maket value and epots a positive impact if geneation pofiles ae less ten pefectly

Lion Hit (2013): Te Maket Value of Vaiable Renewables 27 coelated and supply conditions simila. Tis is indeed te case in te long un, but not wen taking te existing Fenc nuclea capacities into account. Wile Nicolosi (2012) finds a stong and positive effect of gid extension on te mid-tem maket value of Geman wind powe, is finding is diven by te assumption tat Gemany will continue its ole as a enewable island, wit muc ige wind saes tan its neigboing counties. If tis is te case, Geman wind powe benefits fom expoting electicity duing wind times. In contas we assume penetation to be identical in all makets. 5.8 Stoage Electicity stoage is widely discussed as a mean of VRE integation and as a peequisite fo system tansfomation. Hee te influence of stoage on te value of VRE is tested by setting pumped ydo stoage capacity to zeo and doubling it fom cuent levels. Te effect on wind is vey limited: at 30% penetation, te diffeence in value factos between zeo and double stoage capacity is only one pecentage point in te mid-tem and five points in te long tem. Te dive beind tis outcome is te design of pumped ydo plants. Tey ae usually designed to fill te esevoi in six to eigt ous wile wind fluctuations occu mainly on longe time scales (Hit & Mülle 2013). Tus, wind equies a stoage tecnology tat as a lage enegy-to-powe atio tan pumped ydo stoage. Fo sola, te situation is diffeent. Due to its ponounced diunal fluctuations, sola powe benefits muc moe fom additional pumped ydo stoage: at 15% sola maket sae, its mid-tem value facto is five pecentage points ige wit double stoage capacity tan witout stoage. Te long-tem value is nine pecentage points ige. At low penetation levels, oweve, stoage actually educes te value of sola powe by saving te noon peak. Bot wind and sola powe could potentially benefit fom ydo esevoi powe. Hydo powe plants in Noway, Sweden, and te Alps often ave lage ydo esevois. Tey ae able to povide flexibility, even toug tey usually lack te capability of pumping. As mentioned in section 4, esevois ae not modeled in EMMA. Figue 27: Long-tem sola value facto at diffeent stoage assumptions.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 28 5.9 Flexible conventional geneatos Tee ae many tecnical constaints at te plant and te powe system level tat limit te flexibility of dispatcable plants. If tey ae binding, all tese constaints tend to educe te value of vaiable enewables at ig maket saes. Tee types of inflexibilities ae modeled in EMMA: a eat-supply constaint fo CHP plants, a must-un constaint fo supplies of ancillay sevices, and a un-toug pemium tat poxies stat-up and amping costs of temal plants (section 4). Tee ae tecnologies tat can be used to elax eac of tese constaints: CHP plants can be supplemented wit eat stoages o electical boiles to be dispatced moe flexibly. Batteies, consume appliances, o powe electonics could elp to supply ancillay sevices. Bot measues imply tat temal plants can be tuned down moe easily in times of ig VRE supply. In geneal, new plant designs and etofit investments allow steepe amps and quicke stat-ups. To test fo te potential impact of suc measues, eac constaint is disabled individually and jointly. Disegading te constaints altogete is, of couse, a dastic assumption, but gives an indication of te potential impotance of inceasing te system flexibility. Te mid-tem value factos indicate tat te impact of adding flexibility to te system is lage (Figue 28). As expected, adding flexibility inceases te maket value of wind. Wat migt be supising is te size of te effect: making CHP plants flexible alone inceases te value facto by moe tan ten pecentage points at ig penetation levels. All flexibility measues togete incease te maket value of wind by an impessive 40%. At ig wind penetation, te amount of ous wee pices dop below te vaiable costs of ad coal is educed fom moe tan 50% to aound 20% (Figue 29). Wile one needs to keep in mind tat in tis modeling setup complex tecnical constaints ae implemented as simple linea paameteizations, tese esults indicate tat inceasing system and plant flexibility is a pomising mitigation stategy to stem te dop in VRE maket value. Futemoe, flexibility can povide additional benefits by educing balancing costs tus, te impotance of flexibility fo te maket value of wind is pobably undeestimated. Figue 28: Mid-tem maket value fo wind wit additional flexibility measues. Figue 29: Pice setting fuel at 30% wind sae wit and witout inflexibilities in Gemany.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 29 6. Discussion All model esults sould be intepeted keeping metodological sotcomings in kind. Hydo esevois, demand elasticity, and tecnological innovations ae not modeled, wic pobably is a downwad bias to VRE maket values. Intenal gid bottlenecks and VRE foecast eos ae not accounted fo, wic migt bias te value upwads. Also istoical maket data sould be intepeted caefully, keeping istoical conditions in mind. Te elatively low maket sae and te fact tat Gemany and Denmak ae suounded by counties wit muc lowe penetation ates aise doubts if findings can be pojected to te futue. Tese consideations in pinciple also apply to te liteatue eviewed. Te fist and foemost esult of tis study is tat te maket value of bot wind and sola powe is significantly educed by inceasing maket saes of te espective tecnology. At low penetation levels, te maket value of bot tecnologies is compaable to a constant souce of electicity, o even ige. At 30% maket sae, te value of wind powe is educed to 0.5 0.8 of a constant souce. Sola eaces a simila eduction aleady at 15% penetation. Secondly, it is impotant to note tat te size of te dop depends cucially on te time fame of te analysis. If peviously-existing capacity is taken into account (mid-tem famewok), value facto estimates ae usually lowe tan if it is not (long-tem), especially at ige penetation ates. Tis olds fo te eviewed liteatue as well as EMMA model esults. Model esults indicate tat at ig penetation ates, te absolute long-tem maket value is about twice te mid-tem value. Finally, pices and policies stongly affect te maket value of VRE. Table 8 summaizes te effects of te pice and policy socks on wind value factos as estimated in section 5. Some esults ae as expected, suc as te negative effect of low CO 2 pices on te value of wind, te positive effect of ig coal pices on te wind value, o te long-tem benefits of maket integation. A numbe of esults, oweve, migt come as a supise. Fo example, a ige CO 2 pice educes te value of wind by inducing nuclea investments, a ige natual gas pices as a simila effect by inducing coal investments, and inteconnection expansion educe te value of Geman wind because of ceap impots fom Fance. Typically, te eason is tat socks tigge new investments o inteact wit existing conventional capacity, wic can qualitatively alte te impact on VRE maket value. As a consequence, tee ae tee cannels toug wic canges in te enegy system affect te value of VRE, of wic te obvious te impact on te pice level is often not te most impotant one (Figue 30). Figue 30: Policies, pice socks, and a cange of powe system paametes affect te absolute and elative value of VRE toug tee cannels: canges of te electicity pice level, canges of te slope of te meit-ode cuve via vaiable cost canges, and canges of te meit-ode cuve via canges in te capacity mix. Table 8: Dives of wind value factos Cange Value facto Dominating Cains of Causality CO2 pice Steepe meit-ode cuve due to lowe vaiable costs of coal CO2 pice Steepe meit-ode cuve due to investment in nuclea and CCS

Lion Hit (2013): Te Maket Value of Vaiable Renewables 30 CO2 pice nuc/ccs Coal pice Gas pice Inteconnectos Stoage Plant Flexibility (LT) / (MT) Flatte meit-ode cuve due to ige vaiable costs of coal; Oveall pice incease Flatte meit-ode cuve in te ange ad coal gas; Lignite investments patly compensate Steepe meit-ode cuve due to ige vaiable costs of gas; Lignite and ad coal investments einfoce tis effect Long tem: smootening out of wind geneation acoss space; Mid tem: Geman wind suffes fom low pices set by Fenc nuclea Small impact of wind because of small esevois; Negative impact on sola at low penetation ates, positive at ig ates Reduced must-un geneation leads to ige pices especially duing ous of ig wind supply Figue 31 and Figue 32 summaize all mid-tem and long-tem model uns fo wind powe, including tose tat wee not discussed in detail in section 5. Te esulting family of value facto cuves can be intepeted as te ange of value factos intoduced by uncetainty about enegy system paametes (Figue 33). Te model suggests tat te mid-tem wind value facto is in te ange of 0.4 0.7 at 30% maket sae, wit a bencmak point estimate of sligtly above 0.5. Te long-tem value is estimated to be between 0.5 0.8, wit a point estimate of 0.65. Histoical obsevations and te egession line fom section 3.3 lie witin te ange of model esults. Te estimations of wind value factos ae consistent wit most of te pevious studies tat model investments endogenously (Lamont 2008, Nicolosi 2012, Mills & Wise 2012), but somewat lowe tan Swide & Webe (2006). Also, ote findings ae consistent wit te existing liteatue, suc as te wind value facto being above unity at low penetation levels (Sensfuß 2007, Obesteine & Saguan 2010, Enegy Bainpool 2011) and te sola value facto dopping moe apidly tan wind wit gowing maket saes (Lamont 2008, Gowisankaan et al. 2011, Mills & Wise 2012, Nicolosi 2012). Figue 31. All long-tem wind value factos. Te lowest value factos ae estimated at 100 /t CO 2 picing and te igest at 100 /t CO 2 if nuclea and CCS ae unavailable. Figue 32. All mid-tem wind value factos. Figue 33. Paamete uncetainty. Te saded aea indicates te uppe and lowe extemes of mid- and long-tem uns. Te model esults do not imply tat a diffeent maket design is needed to pevent te value dop of VRE. In contas te eduction in value is not a maket failue but a diect consequence of te ineent popeties of VRE. Wy we use te tem maket value, moe pecisely it is te maginal economic value tat is calculated in EMMA wic is independent fom te design of makets.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 31 7. Conclusions Electicity systems wit limited intetempoal flexibility povide a fosty envionment fo vaiable enewables like wind and sola powe. If significant VRE capacity is installed, te meit-ode effect depesses te electicity pice weneve tese geneatos poduce electicity. Tis implies tat te pe MW value of VRE deceases as moe capacity is installed. A eview of te publised liteatue, egession analysis of maket data, and a numeical model of te Euopean powe maket wee used in tis study to quantify tis dop and identify dives. We find tat te value of wind powe is sligtly ige tan te value of a constant electicity souce at low penetation; but falls to 0.5-0.8 at a maket sae of 30%. Sola eaces a simila level at 15% penetation, because its geneation is concentated in fewe ous. We identify seveal dives tat affect te value of enewables significantly. Tese findings lead to a numbe of conclusions. Fistly, tee ae a numbe of integation options tat elp mitigating te value dop of VRE: tansmission investments, elaxed constaints on temal geneatos, and a cange in wind tubine design could be impotant measues. Especially inceasing CHP flexibility seems to be igly effective. Inceasing wind tubine oto diametes and ub eigts educe output vaiability and could elp to stabilize wind s maket value. Secondly, vaiable enewables need mid and peak load geneatos as complementay tecnologies. Biomass as well as igly efficient natual gas-fied plants could play a cucial ole to fill tis gap. On te ote ands, low-cabon base load tecnologies suc as nuclea powe o CCS do not go well wit ig saes of VRE. Tidly, we find tat a ig cabon pice alone does not make wind and sola powe competitive at ig penetation ates. In Euope tat could mean tat even if CO 2 pices pick up again, subsidies would be needed well beyond 2020 to eac ambitious enewables tagets. Finally, witout fundamental tecnological beaktougs, wind and sola powe will stuggle becoming competitive on lage scale, even wit quite steep leaning cuves. Reseaces as well as policy makes sould take te possibility of a limited ole fo sola and wind powe into account and sould not disegad ote geenouse gas mitigation options too ealy. In tems of metodology, we conclude tat any model-based evaluation of te value of VRE needs to featue ig tempoal esolution, account fo opeational constaints of powe systems, cove a lage geogapic aea, take into account existing infastuctue, and model investments endogenously. Te wok pesented ee could be extended in seveal diections. A moe tooug evaluation of specific flexibility options is waanted, including a ice set of stoage tecnologies, demand side managemen long-distance inteconnections, and eat stoage. A special focus sould be paid to te existing ydo esevois in Scandinavia, Fance, Spain and te Alps. Wile tis study focuses on pofile costs, tee ae two ote components tat detemine te maket value of VRE: balancing and gidelated costs. Fute eseac on tose is needed befoe final conclusions egading te maket value of vaiable enewables can be dawn.

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Lion Hit (2013): Te Maket Value of Vaiable Renewables 36 Appendix A: Genealized vecto notation Te matix nomenclatue intoduced in section 3 can be easily genealized to account fo spatial pice and wind vaiability and gid-elated costs (ecall te famewok intoduced in section 1). Te vecto p Tx1 becomes a matix of pices P TxN and te vecto g Tx1 a matix of geneation factos G TxN. A new vecto d Nx1 is intoduced tat contains te spatial weigts of demand wee N is te numbe of pice zones. Equation (1) becomes (A.1) and (2) becomes (A.2). Equation (3) emains uncanged. w p p Pd't t'tn'n P'Gn 'n Gn 't (A.1) (A.2) Appendix B: Numeical Model B.1 Total System Costs Te model minimizes total system costs C wit espect to a lage numbe of decision vaiables and tecnical constaints. Total system costs ae te sum of fixed geneation costs, vaiable geneation costs va C t,, i, and capital costs of stoage, and geneation tecnologies i : wee C ˆ sto C fix C, i tans and tansmission C, ove all time stepst, egions fix va sto tans C, i Ct,, i C C,, i, i, t, inv inv qfix 0 qfix va inv sto gˆ i c i ci gˆ,, i ci g, i ci sˆ c, i inv g, i, i is te investments in geneation capacity and ae annualized specific capital costs and qfix c i 0 gˆ, i (O&M) costs. Vaiable costs ae te poduct of ouly geneation, xˆ inv, ae existing capacities,, c inv c i NTC (B.1) ae yealy quasi-fixed costs suc as fixed opeation and maintenance g t,, i wit specific vaiable costs tat include fuel, CO 2, and vaiable O&M costs. Investment in pumped ydo stoage capacity comes at an annualized capital cost of of additional inteconnecto capacity investment costs pe MW and km ˆ va c i io inv s, sto c but witout vaiable costs. Tansmission costs ae a function ˆ, distance between makets,, specific annualized NTC inv x, NTC c. Uppe-case C s denote absolute cost wile lowe-case c s epesent specific (pe-unit) cost. Hats indicate capacities tat constain te espective flow vaiables. Roman lettes denote vaiables and Geek lettes denote paametes. Te two exceptions fom tis ule ae initial capacities suc as tat ae denoted wit te espective vaiable and zeos in supescipts, and specific costs c. 0 gˆ, i

29 /MW Lion Hit (2013): Te Maket Value of Vaiable Renewables 37 Tee ae eleven tecnologies, five egions, and 8760 times steps modeled. Note tat (1) does not contain a fomulation fo distibution gids, wic contibute a significant sae of ouseold electicity cost. /MW esidual load load 75 17 GW wind 50 25 0 Nuclea Lignite Had Coal CCGT OCGT CHP 76GW Figue 34. B.2 Supply and Demand Te enegy balance (2) is te cental constaint of te model. Demand duing evey ou and in eac egion. Supply is te sum of geneation minus te sum of net expots x t,, plus stoage output Te ouly electicity pice p t, o s t, minus stoage in-feed i s t, g t,, i as to be met by supply. Stoage cycle efficiency is given by. is defined as te sadow pice of demand and as te unit /MW. Te base pice p is te time-weigted aveage pice ove all peiods T. Note tat (2) featues an inequality, implying tat supply can always be cutailed, tus te pice does not become negative. Te model can be intepeted as epesenting an enegy-only maket witout capacity payments, and can be undestood as te maket-cleaing zonal spot pice as being implemented in many deegulated wolesale electicity pool makets. Since demand is pefectly pice-inelastic, cost minimization is equivalent to welfae-maximization, and electicity. p p g C t i p, i T x p t,, p t, can also be intepeted as te maginal social benefit of s o s i (B.2)

Lion Hit (2013): Te Maket Value of Vaiable Renewables 38 Geneation is constaint by available installed capacity. Equation (3) states te capacity constaint fo te VRE tecnologies, wind and sola powe. Equation (4) is te constaint fo dispatcable geneatos, wic ae nuclea, lignite, ad coal, CCGT, and OCGT as well as load sedding. Note tat tecnology aggegates ae modeled, not individual blocks o plants. Renewable geneation is constaint by exogenous geneation pofiles tat captues bot te vaiability of te undelying pi- mi j i t,, j may enegy souce as well as tecnical non-availability. Availability,k is te tecnical availability of dispatcable tecnologies due to maintenance. Dispatcable capacity can be decommissioned endogenously via ˆ dec g, k to save on quasi-fixed costs, wile VRE capacity cannot. Bot geneation and capacities ae continuous vaiables. Te value factos sola elative to te base pice. g g v, j,, j gˆ 0 gˆ, j 0 gˆ, k t gˆ v, j ae defined as te aveage evenue of wind and inv dec k gˆ k,k gˆ k gˆ,,, k,k, mi, j pt,,, j p, j i t, j, j t inv, j, j, j i Minimizing (1) unde te constaint (3) implies tat tecnologies geneate if and only if te electicity pice is equal o ige tan tei vaiable costs. It also implies te electicity pice equals vaiable costs of a plant if te plant is geneating and te capacity constaint is not binding. Finally, tis fomulation implies tat if all capacities ae endogenous, all tecnologies ean zeo pofits, wic is te longtem economic equilibium (fo an analytical poof see Hit & Ueckedt 2012). (B.3) (B.4) B.3 Powe System Inflexibilities One of te aims of tis model fomulation is, wile emaining pasimonious in notation, to include cucial constaint and inflexibilities of te powe system, especially tose tat foce geneatos to poduce at pices below tei vaiable costs (must-un constaints). Tee types of suc constaints ae taken into account: CHP geneation wee eat demand limits flexibility, a must-un equiement fo povides of ancillay sevices, and costs elated to amping, stat-up and sut-down of plants. One of te majo inflexibilities in Euopean powe systems is combined eat and powe (CHP) geneation, wee eat and electicity is poduced in one integated pocess. Hig demand fo eat foces plants to stay online and geneate electicity, even if te electicity pice is below vaiable costs. Te CHP must-un constaint (5) guaantees tat geneation of eac CHP tecnology, wic ae te five coal- o gas-fied tecnologies, does not dop below minimum geneation,. Minimum geneation is a function of te amount of CHP capacity of eac tecnology k, m min g t, and te eat pofile t,, cp. Te pofile is based on ambient tempeatue and captues te distibution of eat demand ove time. CHP capacity of a tecnology as to be equal o smalle tan total capacity of tat tecnology (6). Futemoe, te cuent total amount of CHP capacity in eac egion is not allowed to decease (7). Investments in CHP capacity inv k, dec as well as decommissioning of CHP k, ae possible (8), but only to te extent tat total powe plant investments and disinvestments take place (9), (10). Taken togete, (6) (10) allow fuel switc in te CHP secto, but do not allow educing total CHP capacity. Fo bot te geneation constaint (5) and te capacity constaint (7) one can deive sadow pices CHPgene CHPcapa p t,, ( /MW) and p ( /KWa), wic can be intepeted as te oppotunity costs fo eating enegy and capacity, espectively.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 39 g k k k k, p p, k, inv, dec, g gˆ, k gˆ gˆ CHPgene, t CHPcapa, 0, min, inv, dec, k k inv, C g C min,, k 0, k dec,, cp,, m,,,,, t (B.5) (B.6) (B.7) (B.8) (B.9) (B.10) Electicity systems equie a ange of measues to ensue stable and secue opeations. Tese measues ae called ancillay sevices. Many ancillay sevices can only be o ae typically supplied by geneatos wile poducing electicity, suc as te povision of egulating powe o eactive powe (voltage suppot). Tus, a supplie tat committed to povide suc sevices ove a cetain time (typically muc longe tan te delivey peiods on te spot maket) as to poduce electicity even if te spot pices falls below its vaiable costs. In tis model, ancillay sevice povision is implemented as a must-un constaint (11): An amount of dispatcable capacity as to be in opeation at any time. Wile in eality, is a function of te cuent status of te powe system and tus vaiable, fo te pesent model is set to 20% of te annual peak demand of eac egion. Two pieces of infomation wee used wen setting tis paamete. Fis maket pices indicate wen must-un constaints become binding: if equilibium pices dop below te vaiable cost of base load plants fo extended peiods of time, must-un constaints ae appaently binding. Nicolosi (2012) epots tat Geman powe pices fell below zeo at esidual loads between 20-30 GW, about 25-40% of peak load. Second, FGH et al. (2012) povide a detailed study on must-un geneation due to system stability, taking into account netwok secuity, sot cicuit powe, voltage suppo amping, and egulating powe. Tey find minimum geneation up to 25 GW in Gemany, about 32% of peak load. In EMMA it is assumed tat CHP geneatos cannot povide ancillay sevices, but pumped ydo stoage can povide tem wile eite pumping o geneating. Fo a egion wit a peak demand of 80 GW, at any moment 16 GW of dispatcable geneatos o stoage ave to be online. Note tat temal capacity of 8 GW togete wit a pump capacity of 8 GW can fulfill tis condition witout net geneation. Te sadow pice of k p g AS, k C,,, cp AS p t,,is defined as te pice of ancillay sevices, wit te unit /KW onlinea., s o s i 0.2 max d t (B.11) Finally, temal powe plants ave limits to tei opeational flexibility, even if tey do not poduce goods ote tan electicity. Restictions on tempeatue gadients witin boiles, tubines, and fuel gas teatment facilities and laws of temodynamics imply tat inceasing o deceasing output (amping), unning at patial load, and sutting down o stating up plants ae costly o constaint. In te case of nuclea powe plants nuclea eactions elated to Xenon-135 set fute limits on amping and

Lion Hit (2013): Te Maket Value of Vaiable Renewables 40 down time. Tese vaious non-linea, status-dependen and intetempoal constaints ae poxied in te pesent famewok by focing cetain geneatos to toleate a pedefined tesold of negative contibution magins befoe sutting down. Tis is implemented as a un-toug pemium fo nuclea, lignite, and ad coal plants. Fo example, te vaiable cost fo a nuclea plant is educed by 10 /MW. In ode not to distot its full cos fixed costs ae duly inceased by 87600 /MWa. B.4 Flexibility options Te model aims to not only captue te majo inflexibilities of existing powe tecnologies, but also to model impotant flexibility options. Tansmission expansion and electicity stoage can bot make electicity systems moe flexible. Tese options ae discussed next. Witin egions, te model abstacts fom gid constaints, applying a coppeplate assumption. Between egions, tansmission capacity is constained by net tansfe capacities (NTCs). Ignoing tansmission losses, te net expot x t,, fom to equals net impots fom to (12). Equations (13) and (14) constaint electicity tade to te sum of existing inteconnecto capacity and new inteconnecto investments ˆ inv x, 0 xˆ,. Equation (15) ensues lines can be used in bot diections. Recall fom (1) tat inteconnecto investments ave fixed specific investment costs, wic excluded economies of scale as well as non-linea tansmission costs due to te natue of mesed HVAC systems. Te distance between makets, is measued between te geogapical centes of egions. x x x xˆ,,, inv, x xˆ xˆ xˆ 0, 0, inv,, xˆ xˆ inv, inv,,,,, (B.12) (B.13) (B.14) (B.15) Te only electicity stoage tecnology applied commecially today is pumped ydo stoage. Tus stoage is modeled afte pumped ydo. Some stoage tecnologies suc as compessed ai enegy stoage (CAES) ave simila caacteistics in tems of cycle efficiency, powe-to-enegy atio, and specific costs and would ave simila impact on model esults. Ote stoage tecnologies suc as batteies o gasification ave vey diffeent caacteistics and ae not eflected in EMMA. Te amount of enegy stoed at a cetain ou vol s t, is last ou s amount minus output pumping and geneation is limited by te tubines capacity vol ŝ ŝ o s t, plus in-feed i s t, (16). Bot (17), (18). Te amount of stoed enegy is constained by te volume of te esevois, wic ae assumed to be designed suc tat tey can be filled witin eigt ous (19). Hydodynamic fiction, seepage and evapoation cause te cycle efficiency to be below unity (2). Te only costs elated to stoage except losses ae capital costs in te case of new investments ŝ (1). inv

Lion Hit (2013): Te Maket Value of Vaiable Renewables 41 s s s s vol i o vol vol o i s s s (B.16) sˆ sˆ sˆ t 1, sˆ sˆ vol 0 0 sˆ sˆ 0 inv sˆ sˆ 8 inv inv (B.17) (B.18) (B.19) EMMA is witten in GAMS and solved by Cplex using a pimal simplex metod. Wit five counties and 8760 times steps, te model consists of one million equations and fou million non-zeos. Te solution time on a pesonal compute is about alf an ou pe un wit endogenous investment and a few minutes witout investment. B.5 Altenative Poblem Fomulation In so te cost minimization poblem can be expessed as wit espect to te investment vaiables i o g, i st,, st,,, and te tade vaiable x t,, min C (B.20) ˆ ˆ ˆ inv io, inv inv dec inv dec g, i, s, x,, x,, k,, k, optimal values of te decision vaiables and te sadow pices aggegates p, v, j. ˆ, te dispatc vaiables subject to te constaints (2) (19). Minimization gives CHPgene CHPcapa AS p, p, t, p, t, p and tei B.6 Gapical Model Fomulation

Lion Hit (2013): Te Maket Value of Vaiable Renewables 42 Model Input Model Output demand ouly time seies by county wind sola eat by county powe plant stack NTC values stoage stack seas.availability geneation by tecnology electicity pice coss-bode flows ouly by county ( dispatc ) by tecnology fixed costs quasi-fixed costs efficiencies NTC inv costs (dis-)investment by tecnology NTC investment stoage invest yealy by county ( investment ) stoage inv costs constant fuel pices CO 2 pice Figue A1: Gapical epesentation of te model. B.7 Model Limitations Te model is igly stylized and as impotant limitations. Maybe te most significant caveat is te absence of ydo esevoi modeling. Hydo powe offes intetempoal flexibility and can eadily attenuate VRE fluctuations. Similaly, demand esponse in te fom of demand sifting o an elastic demand function would elp to integate VRE geneation. Ignoing tese flexibility esouces leads to a downwad-bias of VRE maket values. On te ote and, not accounting fo intenal gid constaints and VRE foecast eos, te model does not take into account location and balancing costs, oveestimating te maket value of VRE. Ote impotant limitations to te model include te absence of constaints elated to unit commitment of powe plants suc as limits on minimum load, minimum up-time, minimum down-time, amping and stat-up costs, and pat-load efficiencies; te absence of biomass; te aggegation of powe plants into coase goups; not accounting fo maket powe o ote maket impefections; ignoing all extenalities of geneation and tansmission ote extenalities tan cabon; ignoing uncetainty; not accounting fo policy constaints (tink of te nuclea pase-out in Gemany); absence of any exogenous o endogenous tecnological leaning o any ote kind of pat dependency; not accounting

Lion Hit (2013): Te Maket Value of Vaiable Renewables 43 fo VRE esouce constaints; ignoing gid constaints at te tansmission and distibution level; any effects elated to lumpiness o economies of scale of investments. B.8 Input Data Table A1: Coefficients of coelation between ouly wind pofiles, sola pofiles, and demand fo Gemany and Fance. wger 1 wger wfra sger sfra dger dfra wfra.33 1 sger -.12 -.11 1 sfra -.08 -.12.95 1 dger.16.11.18.21 1 dfra.17.19 -.14 -.13.70 1 Table A2: Cost paametes of geneation tecnologies. Dispatcable VRE CHP possible investment costs ( /KW) quasifixed costs ( /KW*a) vaiable costs ( /MW e) fuel costs ( /MWt) CO 2 intensity (t/mwt) efficiency Nuclea* 4000 40 2 3-0.33 Lignite* 2200 30 1 3 0.45 0.38 Lignite CCS* 3500 140 2 3 0.05 0.35 Had Coal* 1500 25 1 12 0.32 0.39 CCGT 1000 12 2 25 0.27 0.48 OCGT** 600 7 2 50 0.27 0.30 Load sedding - - - ***1000-1 Wind 1300 25 - - - 1 Sola 2000 15 - - - 1 Pumped ydo** 1500 15 - - - 0.70 Nuclea plants ae assumed to ave a life-time of 50 yeas, all ote plants of 25 yeas. OCGT fuel costs ae ige due to stuctuing costs. Lignite costs include mining. * Base-load plants un even if te electicity pice is below tei vaiable costs (un-toug pemium). **Flexible tecnologies ae assumed to ean 30% of tei investment cost fom ote makets (fo example egulating powe). ***Tis can be intepeted as te value of lost load (VOLL). (1) Tansmission investment costs ae one million Euo pe GW NTC capacity and km bot fo AC and DC lines.

Lion Hit (2013): Te Maket Value of Vaiable Renewables 44 Specific Costs Specific Costs 1400 120 /KW/a 1000 /KW/a 100 80 600 60 200 0 100 200 300 400 500 40 4000 5000 6000 7000 8000 Figue A2a: LCOE of all tecnologies (peak load) as a function of FLH. Load sedding is te ceapest tecnology fo up to 80 FLH. Figue A2b: LCOE of all tecnologies (mid and base load) as a function of FLH. /KW/a 800 600 400 Full Costs (Sceening Cuves) Nuclea Lignite Had coal CCGT OCGT Sedding CCS Min Cost 200 0 0 2000 4000 6000 8000 Figue A2c: Sceening cuves: Specific full costs ( /KW) as a function of FLH fo diffeent tecnologies.