The Market Value of Wind and Solar Power: An Analytical Approach

Several studies have shown that the revenues of wind and solar power generators on spot markets (“market value”) decline with increasing deployment. This “value drop” is often discussed quantitatively but infrequently analytically, a gap that this paper aims to fill. We derive a formal expression of the market value as a function of the penetration rate. At low deployment, the market value is driven by the covariance over time between winds or sunshine and electricity consumption. In countries where power demand peaks at noon during summer, the value of solar power is initially high; the equivalent is true for wind power in those regions where stormy winters coincide with periods of high demand for heating. As deployment increases, however, we show that the market value declines linearly with the penetration rate in energy terms (market share). The slope of the decline is determined by the relative variance of wind or sun: the more the output is concentrated in a few hours of the year, the steeper the drop in value. It is in this sense that variability (intermittency) “causes” the value drop. A drop in market value is also a feature of a power generation technology that operates constantly, but the drop is smaller in size.