Performance of wholesale electricity markets with high wind penetration

This paper examines the impact of progressively deeper levels of wind generation and/or abatement on the performance of a wholesale market and its incumbent thermal generators with non-convex unit commitment constraints. Comparison is made to the result that marginal cost pricing should induce investors to build the least-cost capacity mix, since it is not clear that this will hold in renewable-rich systems. It is first found that unit commitment and forecast uncertainty do not cause significant departure from this result when the generator fleet is optimal. ‘Optimality' in this sense is determined in a capacity expansion problem that does not feature unit commitment, and which allows thermal generators to be built or retired as greater renewable generation or abatement is mandated. In contrast, the wholesale market with no retirement of thermal generation experiences progressively greater disparity between total system prices and costs, and lower returns to generators, simply due to over-capacity rather than any form of variability-related market failure. A carbon price is observed to be far superior to a renewable portfolio standard when the existing set of thermal generators do not retire, but this difference is less stark when the generation mix is optimal. The implications of these results for market design and system planning are then discussed. •Least-cost optimal generation fleets are revenue sufficient in an energy-only market with wind forecast errors•With increasing renewables and no exit from thermal plant, market revenues do not recover costs simply due to over-capacity.•A carbon price is superior to an RPS, but this is less so when generators are immediately responsive to these policies.