Fat Tails due to Variable Renewables and Insufficient Flexibility

Ronald Huisman, Evangelos Kyritsis and Cristian Stet

No 134, Working Papers from VATT Institute for Economic Research

Abstract: The large-scale integration of renewable energy sources requires flexibility from power markets in the sense that the latter should quickly counterbalance the renewable supply variation driven by weather conditions. Most power markets cannot (yet) provide this flexibility effectively as they suffer from inelastic demand and insufficient flexible storage capacity. Research accordingly shows that the volume of renewable energy in the supply system affects the mean and volatility of power prices. We extend this view and show that the level of wind and solar energy supply affects the tails of the electricity price distributions as well, and that it does so asymmetrically. The higher the supply from wind and solar energy sources, the fatter the left tail of the price distribution and the thinner the right tail. This implies that one cannot rely on symmetric price distributions for risk management and for valuation of (flexible) power assets. The evidence in this paper suggests that we have to rethink the methods of subsidizing variable renewable supply such that they take also into consideration the flexibility needs of power markets.

Keywords: intermittent renewable supply; flexibility; power prices; fat tails; asymmetric probability distribution; Environment; energy and climate policy; C10; Q41; Q42; Energia; ilmasto ja ympäristö (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-rmg
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