Wind power expansion and regional allocative efficiency among fossil-fuel electricity generators

Abstract

Integrating wind power demands more generation fleet flexibility and incurs more incidences of transmission congestion, which may impose a negative effect on how efficiently regional production is allocated among fossil fuel electricity generators (we call it “regional allocative efficiency”). Exploring exogenous variations in wind power generation conditional on wind turbine capacity, we analyze wind-induced allocative efficiency loss by comparing the average cost sensitivity of fossil-fuel generator utilization between periods of different wind generation levels in a US regional electricity market. Results show that the utilization of fossil fuel generators becomes less sensitive to their costs as the share of wind power increases. This effect is more pronounced when wind power is more volatile and when transmission capacity is less sufficient. The back-of-envelope calculation based on our empirical findings suggests that the private inefficiency cost is nontrivial: taking it into account would increase the levelized cost of wind energy by $12/MWh, amounting to approximately 17% of the traditional estimates. Further incorporating the social damage of carbon dioxide in the calculation implies that the privately inefficient substitution from cheap coal to expensive gas units instead brings a net social benefit; nonetheless, our estimated private cost is still policy-relevant since it is a local burden while the carbon abatement benefit is shared globally.