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Dynamic volatility spillover effects between wind and solar power generations: Implications for hedging strategies and a sustainable power sector

Feng Song, Jian Cui and Yihua Yu

Economic Modelling, 2022, vol. 116, issue C

Abstract: Large-scale wind and solar development is impeded severely by their inherent volatilities. This study applies a novel approach to reduce the renewable investment risks from the production perspective, although there are many related studies from the financial market perspective. Using daily data from the Gansu province of China between 2013 and 2018 based on a VAR-GARCH model, we first find that wind and solar power generation are volatile, negatively correlated, and exhibit strong time varying spillover effects. We then apply three different approaches to calculate the hedge ratios and optimal capacity portfolios of wind and solar in Gansu. The result from the best MVP approach shows that the optimal capacity weights are 28.3% for wind and 71.7% for solar. This study sheds light on designing a joint development strategy to reduce security risks and integration costs during transition toward a low carbon power sector.

Keywords: Renewable energy; VAR-GARCH; Dynamic volatility spillovers; Hedging strategy; Sustainable economy (search for similar items in EconPapers)
JEL-codes: C32 G11 O53 Q42 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.econmod.2022.106036

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