New Analysis: The Effect of Growing Wind Energy on Midwestern Electricity Prices Over the Past 8 Years

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Post date: September 19, 2017
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A recently released GPI report looks at the extent to which growth in wind energy has reduced electricity prices in the Midwestern market.

In conjunction with the Colorado School of Mines, GPI undertook a comprehensive empirical investigation and found a significant decrease in electricity prices attributed to wind energy in the Midcontinent ISO (MISO) market.

Compared to other forms electricity generation, wind plants have a low marginal cost to produce electricity. As a result, the presence of wind energy in the market lowers prices.

We found that over the period of 2008-2016, every 100 megawatt-hours (MWh) of additional wind energy production had the effect of lowering the wholesale electricity price by $0.24/MWh. Our estimate comes from a variety of econometric models designed to isolate this effect from other factors that determine electricity prices including fuel costs, electricity demand, plant outages, and transmission constraints. For comparison, our models find that every 1 cent increase in the natural gas price ($/MMBtu) has reduced the electricity price by an average of about 4 cents ($/MWh) over the same period.

As wind energy on the MISO system has grown over time, we observe the marginal effect of wind generation on prices declining over time (see Table 1 and Figure 1).The time periods used in Table 1 were necessitated by structural changes in the MISO market: First Energy, a major market participant, exited the MISO system in May 2011. Additionally, the market territory of four southern states was added to the MISO system in December 2013.

The report discusses mechanisms explaining the observed decrease in marginal effects over time reported in Table 1. These include the changing slope of the supply curve as well as improvements to transmission infrastructure and market dispatch of wind resources over time. The report also discusses applications to electricity price forecasting, including forecasting the effects of future increases in wind generation.

This study utilizes a variety of new approaches to estimate the effects of wind energy on electricity prices and is also the first empirical study of its kind focusing on the Midcontinent ISO market. The results show:

  1. 1. The magnitude of the effect of additional wind on electricity prices has been about $0.24/MWh for every additional 100MWh of wind on average from 2008-2016.
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  3. 2. The relative effect has declined over time as more wind is added to the system. We expect the marginal effects to continue to decline in the Midcontinent market as wind energy continues to be added to the system.

Understanding the nature of wind energy's effects on prices is important for regulators, system operators, and market participants to inform their economic evaluation of long-term generation investments and help them plan for a rapidly changing electricity system.