The Economics of Variable Renewable Energy and Electricity Storage

Javier Lopez Prol and Wolf-Peter Schill

Annual Review of Resource Economics, 2021, vol. 13, issue 1, 443-467

Abstract: The transformation of the electricity sector is a central element of the transition to a decarbonized economy. Conventional generators powered by fossil fuels have to be replaced by variable renewable energy (VRE) sources in combination with electricity storage and other options for providing temporal flexibility. We discuss the market dynamics of increasing VRE penetration and its integration in the electricity system. We describe the merit-order effect (the decline of wholesale electricity prices as VRE penetration increases) and the cannibalization effect (the decline of VRE value as its penetration increases). We further review the role of electricity storage and other flexibility options for integrating variable renewables and how storage can contribute to mitigating the two mentioned effects. We also use a stylized open-source model to provide some graphical intuition on these issues. While relatively high shares of VRE are achievable with moderate amounts of electricity storage, the role of long-duration storage increases as the VRE share approaches 100%.

Keywords: energy transition; decarbonization; variable renewable energy sources; electricity storage; merit-order effect; cannibalization effect (search for similar items in EconPapers)
JEL-codes: C63 Q42 Q58 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (16)

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DOI: 10.1146/annurev-resource-101620-081246

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