Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101953
Authors: 
Hirth, Lion
Ueckerdt, Falko
Edenhofer, Ottmar
Year of Publication: 
2014
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 39.2014
Abstract: 
The economics of electricity is shaped by its physics. A well know example is the non-storability of electricity that causes its price to fluctuate widely. More generally, physical constraints cause electricity to be a heterogeneous good along three dimensions - time, space, and lead-time. Consequently, different generation technologies, such as coal and wind power, produce different economic goods that have a different marginal economic value. Welfare maximization or competitiveness analyses that ignore heterogeneity deliver biased estimates. This paper provides an analytical welfare-economic framework that accounts for heterogeneity for unbiased assessments of power generators. The framework offers a rigorous interpretation of commonly used cost indicators such as ‘levelized electricity costs’ and ‘grid parity’. Heterogeneity is relevant for all generators, but especially for variable renewables such as wind and solar power. We propose a definition of ‘variability’, derive the opportunity costs of variability, and link that concept to the ‘integration cost’ literature. A literature review shows that variability can reduce the value of wind power by 20-50%. Thus it is crucial that economic analysis accounts for the physics of electricity.
Subjects: 
Power Generation
Electricity Sector
Integrated Assessment Modeling
Variable Renewables
Integration Costs
Welfare Economics
Power Economics
Levelized Electricity Cost
Grid Parity
JEL: 
Q42
D61
C61
Document Type: 
Working Paper

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